Commonwealth Bank has flagged an additional $2 billion share buyback and lifted its interim dividend after delivering a stronger than expected rise in first-half profit despite competitive pressures.

Australia’s biggest lender saw pressure mount on margins but offset this by clawing market share from rivals and says it’s positive about the outlook for fiscal 2022 as the economy gathers pace despite the challenges from the Omicron variant of COVID-19.

Net cash earnings, the bank’s preferred measure of profitability, jumped 23 per cent over the six months to December 31, to $4.7 billion.

Its statutory net profit also climbed 26 per cent from the same period last year to a similar figure, while operating income was up 2 per cent to $12.2 billion.

“We’ve delivered a strong result in a low rate environment. Our continued customer focus and disciplined operational execution is reflected in our volume growth for the half,” chief executive Matt Comyn told an investor briefing on Wednesday.

CBA shares rallied after the solid result. By 1430 AEDT, the stock was up 5.5 per cent to $99.50 to be among the top gainers in the firm Australian market.

Despite the encouraging bottom line, the lender recorded a sharp drop in net interest margin – what it earns on loans less funding and other costs. The NIM fell 14 basis points from the previous six-month period to 1.92 per cent.

This was mainly driven by customers switching to fixed rate home loans, rising swap rates and intense competitive pressure in the home loan market.

“We’ve taken a range of actions on both sides of the balance sheet over the past three years to manage margins in this historically low interest rate environment. And despite continued action, margins in the half [year] were impacted by increases in the swap rate and switching to lower margin fixed rate loans,” Mr Comyn said.

CBA expects the pressure on margins to persist in the second half of the financial year.

But the bank managed to cushion the impact, instead lifting its net interest income by 1.5 per cent over the six-month period, by growing faster than the industry average rates in the home and business lending market as well as in sourcing deposits.

Smaller rivals Westpac and ANZ have both flagged margin pressure in their earnings updates in the past few days, and National Australia Bank is likely to repeat the warning at its quarterly trading update on Thursday.

“We expect CBA’s margins to remain under pressure during the second half,” ratings agency Moody’s said in a note.

“Still, a rising cash rate over the longer term will provide support to margins. CBA continues to grow above-system rates in its home and business loans, which are a key support to profits.”

CBA itself is counting on savings accumulated by households and likely stronger wage growth to help buoy economic growth in 2022, even though it is tipping for the Reserve Bank to lift rates later this year to combat rising inflation.

“Despite this, we see strong underlying momentum in Australia and an upgrade on the outlook through to the end of 2023.” Mr Comyn said.

The bank is rewarding shareholders by expanding its on market share buyback by $2 billion, on top of the massive $6 billion buyback announced in October.

Its common equity tier-one capital ratio will drop to 11.4 per cent after completion of the buyback, but still well above the banking regulator’s “unquestionably strong” capital threshold.

CBA also increased its interim dividend for shareholders to $1.75, up 25 cents from a year ago.

CBA’s first-half profit jump

• Cash earnings up 23 per cent to $4.7 billion
• Net profit up 26 per cent to $4.7 billion
• Revenue up 3 per cent to $12.26 billion
• Fully-franked final dividend $1.75/sh vs $1.50 cents year ago.

-AAP