FILE PHOTO: A Commonwealth Bank of Australia (CBA) logo is displayed above a branch in Sydney, Australia, October 15, 2025. REUTERS/Hollie Adams/File Photo

(Reuters) -Commonwealth Bank of Australia, the country's biggest bank by market value, reported higher first-quarter cash profit on Tuesday, propelled by robust growth in home loans and deposits that more than compensated for narrowing interest margins caused by rate cuts and fierce competition.

While the Reserve Bank of Australia's three interest rate cuts this year have stimulated the housing market and credit growth, the resulting decline in mortgage rates has pressured bank margins, with the benefit of higher lending volumes failing to offset lower interest income per loan.

Net interest income climbed 3%, buoyed by volume growth and 1.5 additional trading days. But headline net interest margin, profitability per dollar lent, narrowed as the bank held more cash and low-return liquid assets — up A$12 billion, driven mainly by an A$10 billion surge in institutional deposits — along with A$5 billion more in short-term lending to other financial institutions.

CBA said underlying margins edged lower amid deposit switching and broader market competition in a lower-rate backdrop, with pricing pressure evident in mortgages and deposits alongside a mix shift into lower‑yielding liquid assets.

"We are closely watching the increased competitive intensity and implications across the financial system, and we will continue to adjust our settings as appropriate," CEO Matt Comyn said.

Unaudited cash profit came in at around A$2.6 billion ($1.69 billion), up 1% from the average of the previous two quarters and 2% higher than a year earlier, as the lender — which writes roughly a quarter of Australia's A$2.2 trillion in mortgages — continued to gain market share in home lending and household deposits.

Home lending expanded A$9.3 billion in the quarter, while household deposits surged A$17.8 billion.

Credit quality remained solid. The bank set aside A$220 million for potential loan losses, equal to 9 basis points of its loan book. Overdue home loans improved to 0.66% of the portfolio, and problem business loans declined to A$6.2 billion, or 0.94% of total corporate lending.

Operating expenses rose 4%, stripping out one-offs, on wage growth and technology costs.

($1 = 1.5389 Australian dollars)

(Reporting by Roushni Nair and Sneha Kumar in Bengaluru; Editing by Alan Barona)