CBA: spending starting to fall
CBA was starting to see a fall in spending on its debit and credit cards on a seasonally adjusted basis as consumer confidence fell below levels last seen during the GFC, CBA CEO Matt Comyn said on Wednesday.
Speaking at a briefing where CBA announced an 11 per cent rise in full-year cash profit to $9.6 billion for the year to June, he said spending was falling more acutely for interest rate sensitive cohorts such as homebuyers.
“The cash rate has already increased to 185 basis points, but given the lag in transmission, the effects of this have not yet fully been felt,” he said.
“By December, the impact of already announced rate rises on monthly cash flows for mortgage holders will be more than four times higher than what customers experienced in July.
“This is because 40 per cent of our mortgages are fixed and the majority will mature in the next two years.”
Comyn said CBA economists believed the tightening cycle would peak with a cash rate of 260 basis points by the end of the year.
“However, if aggregate demand across the economy does not fall, inflation will increase further and rates will likely need to rise higher to a cash rate above 300 basis points. A 3 per cent cash rate is not out of the question which would take us back to levels that we've not seen since 2013.”
Comyn said the impact of rising rates would grow to a level around the equivalent of 1.5 per cent of GDP.
“In addition, there are further impacts from rising energy and food prices which will flow through over the course of the year.”
On the positive side, Comyn said there were several metrics that are extremely strong. “Unemployment is near 50-year lows, underemployment is very low and the terms of trade are strong as is non-mining investment.
“It is a challenging time, but we remain optimistic that a path can be found to navigate through these economic conditions. We remain of the view that the medium-term outlook for Australia is a positive one.”
Meanwhile, CBA ended the 2022 financial year with a Common Equity Tier 1 (CET1) capital ratio of 11.5 per cent.
Its net interest margin (NIM) was down 18 basis points to 1.9 per cent, mainly as a result of a large increase in low-yielding lower home loan margins, partly offset by increased deposit earnings.
The response to CBA’s results from ratings agencies was positive.
Daniel Yu, vice president of Moodys Investors Service, said: “CBA’s FY2022 statutory profit of $9,673 million is credit positive as it rose 9 per cent from the prior year. The increase is supported by a $357 million loan impairment benefit – a significant turnaround from the $554 million loan impairment expense in the prior year.
“Whilst the bank’s NIM fell 18 basis points to 1.9 per cent, rising interest rates should drive its NIM higher over the next 12 to 18 months. Still, this benefit will be partly offset by a normalisation of credit costs and lower credit growth as Australia’s housing market continues to slow.”
Yu noted that CBA’s solid common equity tier 1 ratio of 11.5 per cent was above the bank’s minimum target of 11 per cent and APRA’s current “unquestionably strong” requirement of 10.5 per cent.
S&P Global Ratings said strong lending growth across all core businesses, a relatively benign outlook for the Australian economy, and rising interest rates would continue to support CBA’s strong and stable earnings.
“The results were solid and in line with our expectations,” it said.
“CBA's (AA-/Stable/A-1+) capital levels will remain strong despite the bank returning capital to shareholders via dividends and previously announced share buybacks. We forecast the bank's risk-adjusted capital ratio to remain at 10.5 per cent to 11 per cent in the next two years.
“We consider that CBA's earnings will remain robust by international comparison. Over the medium term, CBA's net interest margin is likely to improve on the back of rising interest rates, in our view. We consider that CBA's strong franchise will continue to sustain its above-system loan and deposit growth in its core businesses.”
S&P Global Ratings predicted that CBA’s credit losses would remain low and close to pre-COVID levels at about 15 basis points over the next two years.
“The relatively benign economic outlook, falling unemployment and strong household balance sheets should help temper the risks to the Australian banking system from rising inflation and low business and consumer confidence.
“A loan impairment benefit reflected a reduction in provisions because of prior uncertainties associated with the pandemic.
“We forecast that house prices in Australia will fall in an orderly manner by about 15 per cent over the next two years. Nevertheless, a steeper fall in house prices could heighten economic risks for banks."