CBA braces for mortgage arrears amid rate hikes, inflation, but CEO Matt Comyn upbeat on economy’s medium term prospects

Commonwealth Bank chief Matt Comyn says the lender is bracing for a jump in mortgage arrears as rate hikes and cost of living pressures hit, but is optimistic about medium-term prospects.

Commonwealth Bank chief Matt Comyn says the lender is bracing for a jump in mortgage arrears as rate hikes and cost of living pressures hit, but he remains “optimistic” about the economy’s medium-term prospects.

At the bank’s annual meeting, Mr Comyn said Australia had to navigate an “uncertain environment” in the near term, given high levels of inflation and expectations of soaring energy costs.

For the banking sector, the situation is exacerbated by $500bn in fixed-rate home loans nearing their end of their terms, when the mortgages revert to markedly higher variable rates.

“There will be future periods of economic difficulty and heavens knows what other challenges may occur,” Mr Comyn said. “It’s a very important priority and focus for us … to be engaging proactively with customers well in advance of their fixed-rate maturities, so they can best prepare for that.

“We remain fundamentally optimistic about the medium-to-long term opportunities for Australia, as well as our capacity to provide support in the immediate future for customers who need us.

“We are also very conscious that a number of our personal and business customers are feeling very concerned about rising inflation and rising interest rates.”

His comments come as financial markets are alert to the potential for several countries, including the US, to enter a recession in 2023. The fear is that sharp rate hikes will cause a retreat in consumer spending and economic activity in coming months.

CBA’s new chairman Paul O’Malley, who took the reins from Catherine Livingstone in August, said he expected many borrowers to feel the pinch from the Reserve Bank’s tightening cycle.

“It’s incredibly difficult in a rising interest rate environment, which we have not seen in Australia for many, many years,” he added. “We again have to be cognisant that many customers will find it incredibly challenging, particularly … as they roll off fixed-rate loans into variable-rate loans.

“There are a whole lot of processes we follow before we even provide a loan to mitigate that, but the lesson that was reinforced to us during the pandemic was proactive engagement with customers, and that proactive engagement is occurring today.”

Commonwealth Bank chair Paul O’Malley and chief executive Matt Comyn. Mr O’Malley said he expected many borrowers would feel the pinch from the Reserve Bank’s aggressive tightening cycle. Picture: NCA NewsWire / Luis Ascui

S&P Global Ratings last week signalled an expected rise in loan arrears – of mortgages that are packaged up and sold as bonds – in the third quarter, and “more advanced arrears” surfacing in 2023.

The RBA has also warned of a deteriorating credit climate.

Last week, the central bank said highly indebted borrowers would experience a dent in their savings and some may run out of deposit and mortgage repayment buffers, given subsequent rate rises and higher living costs.

The CBA meeting is its first in-person investor gathering since 2019, due to Covid-19 disruptions.

The bank – which is the nation’s biggest home lender – expects a further 25 basis point rise in official interest rates by the RBA in November, before rates plateau. The RBA has hiked rates rapidly since May, with the cash rate increased six times from 0.1 per cent to 2.6 per cent.

Investors also used the meeting to pepper Mr O’Malley with questions about CBA’s climate report and financing plans around a net-zero emissions target by 2050.

Mr O’Malley reaffirmed the bank would not service large customers that didn’t have firm emission reduction and transition plans in place by 2025.

“For those large customers that chose not to have a transition plan by 2025 we will not be able to bank them,” he said.

Mr O’Malley also told the annual meeting that the bank was committed to helping support Australia’s growth agenda and transition to a more sustainable economy. He cited a target for CBA to provide at least $70bn in cumulative funding to renewable energy projects by 2030, of which it had tallied up $30bn so far. “Our lending exposure into renewables is one of our growth areas of lending, and it’s an area that we do want to contribute to,” he said.

Mr O’Malley outlined that climate change was a “major focus” for the CBA board and management, and the bank was embedding priority sector emission reduction targets.

But the bank has faced criticism for not putting an end date on its financing of oil and gas projects, and Mr Comyn admitted on Wednesday that CBA was below some of its own so-called glide paths to lower emissions across different sectors.

Still, shareholders overwhelmingly voted against a resolution put to the meeting by activist group Market Forces, after CBA’s board urged investors not to support it. The resolution related to a proposed amendment to the bank’s constitution which – if approved by 75 per cent or more of votes cast – would result in a further motion regarding “climate risk safeguarding” being put to shareholders. The resolution saw 96.5 per cent of votes lodged against it. The meeting was, however, interrupted by climate protests, including singing by a choir.

CBA – which released its first stand-alone climate report in August – has set a 2030 target to cut its financed emissions in thermal coal mining to zero, but in other sectors the reduction will be phased. The bank has set its first sector-level targets across four priority sectors for reduction in financed emissions, aligning with an aim to limit global warming to 1.5C. They span power generation, upstream oil, upstream gas and thermal coal mining.

Investors backed the bank’s remuneration report, granting of securities to Mr Comyn and the election of ex- Westpac executive Lyn Cobley to the board.

CBA shares rallied 2.4 per cent to $96.29 on Wednesday.

Originally published as CBA braces for mortgage arrears amid rate hikes, inflation, but CEO Matt Comyn upbeat on economy’s medium term prospects