By Scott Murdoch and Rajasik Mukherjee
May 13 (Reuters) - Shares of Australia's largest mortgage lender, Commonwealth Bank of Australia (CBA), dropped 9% on Wednesday after it set aside A$200 million more in provisions to prepare for risks linked to the Middle East conflict and investors reacted to housing tax changes in the federal government's budget.
CBA said cash net profit after tax stood at about A$2.7 billion ($1.95 billion) for the three months ended March 31, compared with about A$2.6 billion a year
earlier. The result was about 2% below some analysts' forecast.
Australian bank shares were sold off on Wednesday as investors questioned whether mortgage credit growth could slow after major tax changes were announced on Tuesday.
Australia's centre-left Labor government said in its annual budget it would limit negative gearing for residential property, which allows investment losses to be offset against taxable income, to new buildings to help boost housing supply.
It also said a 50% capital gains tax (CGT) discount on assets held for more than a year would be scrapped. Instead, tax would be paid on inflation-indexed gains, with a 30% minimum tax on net capital gains.
The decision, analysts said, could slow investor mortgage demand from the Australian banks as the sales turnover of existing housing was expected to weaken.
"Changes to negative gearing and CGT, which will dampen investor activity, come as rates are rising, consumer sentiment has troughed and construction costs are rising," said Citigroup analyst Thomas Strong.
CBA's 9% share price fall puts the bank on track for its worst one-day trading session since March 2020.
Shares of Westpac, which has the second-largest mortgage lending business in Australia, were down 3% while National Australia Bank was off 2.6% and ANZ Group fell 1.65%. The S&P/ASX200 index was off 0.7%.
In its earnings report, CBA said mortgages, business lending, and household deposits all grew in the three months to March 31, which drove a 1% gain in its net interest income, despite competitive pressure in home and business loans.
CBA said it would increase its collective provisions by A$200 million as the bank revised its macroeconomic forecasts and increased the chance of a 'downside' economic scenario emerging.
The bank said its net interest margin for the quarter was broadly stable, excluding non-recurring tailwinds, but did not disclose a margin number in its limited trading update.
CBA's common equity tier 1 (level 2) ratio, a measure of spare cash, stood at 11.6% as of the end of March.
The company said its third-quarter loan impairment charges rose to A$316 million from A$223 million a year earlier, citing higher collective provisions as a result of increased geopolitical and macroeconomic uncertainty.
"Conflict in the Middle East is disrupting critical supply chains and contributing to global uncertainty," Chief Executive Officer Matt Comyn said.
($1 = 1.3818 Australian dollars)
(Reporting by Scott Murdoch in Sydney; Additional reporting Rajasik Mukherjee in Bengaluru; Editing by Shinjini Ganguli and Jacqueline Wong)
