Record CBA profit reveals banks feeding off FOMO housing frenzy
CBA’s latest record $10.2bn profit is sure to anger Australian households currently struggling with rising rates and cost of living pressures.
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When Australian households currently struggling with cost of living pressure read headlines around Commonwealth Bank’s (CBA) latest record $10.2bn profit, the anger will no doubt be considerable as so many took out mortgages during a low interest rate environment.
The competition during the Covid-19 induced a rate cut race to the bottom between lenders.
That meant the net-interest margin (NIM) banks typically maintained for a brief period, fell below the two per cent mark, according to Reserve Bank data.
NIM is essentially interest earned from loans, minus the interest paid on deposits. Following 10 consecutive rate increases, the Commonwealth Bank’s variable home loan rate is now at 6.24 per cent and deposit rate at 4.25 per cent.
Australia’s banks fund their lending activity through a combination of deposits, offshore and domestic borrowing including funds from the Reserve Bank of Australia.
Competition for customers in the mortgage market has since moderated and Australia’s institutions need to feed the FOMO housing frenzy.
The closely followed net interest margin metric has been moving higher as banks, now managing significantly enlarged loan books, are also trying to manage a customer base under pressure.
Sentiment around the prospects of the Australian economy are best exemplified by the National Australia Business confidence and Westpac consumer sentiment report where on the most recent release are themes of overriding pessimism despite quite strong trading conditions dominate.
Westpac in its June report on the state of mind of the consumer, indicated that sentiment was near recession lows.
The $10bn CBA profit print will also provide further ammunition to those arguing about intergenerational unfairness.
The big four banks, who account for three-quarters of home loans, maintain that margin is not only key but a metric closely followed by shareholders (predominantly superannuation funds and retirees) accustomed to generous dividends provided by Australia’s finance sector.
In dollar terms, the total mortgage pool across owner-occupier and investment property sits at $2.17 trillion dollars according to the Australian Prudential Regulatory Authority (APRA).
That’s up 20 per cent (or an increase of $365bn) from when Australia entered the Covid-19 period in January 2020.
When state and indeed the Federal government propose $10bn funds to meet the housing challenge, the APRA data suggest such initiatives are somewhat futile in light of the collective loan book as well as the value of Australia’s housing stock which jumped from $7.2tr to $10.1 trillion (plus 38 per cent) over the same period.
Poor old Joe Q Public is in a funk as uncertainty grips a nervous mortgage belt and the banks especially may need to be better attuned to those living on tightening margins.
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Originally published as Record CBA profit reveals banks feeding off FOMO housing frenzy
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