NIMs, which compare a bank’s funding costs with what it charges for loans, are a key driver of bank profitability. Margins expanded during the cycle of official interest rate rises that kicked off in May 2022 before being squeezed by mortgage competition last year.

A key reason why Reserve Bank rate rises boosted bank profit margins is that banks were quick to raise interest rates on their loans by the same amount as the Reserve but slower to pass on the increase to depositors, who typically have to jump through hoops to get the more competitive “bonus” rates of interest. Banks also benefit from higher rates because they can earn a better return on money that is effectively free because it sits in transaction accounts that pay zero or minimal interest.

Jefferies analyst Matt Wilson points out that CBA’s retail banking arm makes about 20 per cent more in net interest income from deposits than it does from home loans. “They make more money from deposits because they pay well below the cash rate on deposits,” he says.

The stabilisation in CBA’s margin is likely to be seen as good news for other banks, as will the news that Australia’s biggest bank is experiencing less bad debt pain than many expected.

But when many think CBA shares are already overpriced, another question doing the rounds is: What would a rate cut mean for the CBA profit machine?

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The impact would be mixed, because lower rates would be good for banks in some ways, such as helping the housing market (good for loan growth), while giving struggling borrowers more breathing space. But overall, bank-watchers say rate cuts would slow down the CBA profit engine.

If rates were to fall, Wilson says it would be negative for banks’ bottom lines because it would compress the margin between the rates on deposits and the cash rate. “Lower rates are bad for banks,” he says.

Markets are convinced rate cuts are coming – indeed, investors are betting on Reserve Bank rate cuts this year, even though the Reserve says that’s unlikely. If those cuts arrive, it could slow (slightly) the big profits being churned out by CBA and its peers. That’s because the process of margin expansion that all banks enjoyed when the RBA was raising rates would, at least in part, go into reverse.