How free money makes a stunning CBA profit

It wasn’t hard for the CBA to make a ‘stunning’ $4.75bn interim profit given the billions of dollars of free money it was getting from the RBA and could lend out at 2 per cent or more.

CBA CEO Matt Comyn. Picture: Adam Yip

Whoa! Calm down. Try sipping the Kool-Aid rather than gulping it down – my advice to a certain columnist in another paper who went gushingly over the top describing the CBA profit as stunning.

It’s not exactly hard to make a ‘stunning’ profit when the Reserve Bank and the US Fed combine to mandate you get – literally – hundreds of billions of dollars of free money, that you can then lend to people queuing up at your doors to buy property, paying 2 per cent interest and much higher.

I refer the Fin Review’s Chanticleer columnist to page 68 of the CBA detailed profit report. It showed CBA paid out all of $2.25bn in interest in the December half year, on the $1007bn of deposits and other borrowings the bank had.

Do the math, as they say. CBA was paying just 0.22 per cent interest on average on the trillion dollars of money it got from depositors and all its other sources of finance.

If you break it down further, it was in fact paying close to absolute zero to its ‘faithful’ depositors – most of that $2.25bn was paid on the money it got from the ‘big end of town’.

On the other side, it raked in $11.9bn in interest income on the $844bn in home loans and other forms of lending it had outstanding; including, true, money that was sitting in the RBA’s virtual reality vault at zero interest income.

CBA CEO Matt Comyn. Picture: Adam Yip

But then, again on the other side, it was getting $52bn from the RBA of free money – OK, it has to pay all of 0.1 per cent interest – and will keep getting most of that until June 2024.

The $11.9bn raked in was a – if, Chanticleer will permit me to borrow the word - stunning 5.3 times the $2.25bn it paid out to depositors and other sources of money.

It’s similar for all the banks, although the CBA has the best and most trusted (for security) banking brand, unquestionably in Australia and arguably in the entire world, and so gets its money ever-so but tellingly cheaper.

That 5.3 times ratio between what CBA got paid in interest by its borrowers and what it had to pay depositors, was the highest, and by far, that it’s ever been.

In the December 2020 half – when the RBA was only getting started (Melbourne Cup Day) in ramming down a 0.1 per cent rate, right across the financial system – the ratio was ‘only 3.8 times.

That – across-the-board free money - is the prime reason for the CBA’s, actually somewhat less than stunning, profit in the latest December half.

Don’t get me wrong; it was a very good result. CBA CEO Matt Comyn and his team put their trillion dollars of all-but free money to good use.

But the real performance was just a 4 per cent lift in real operating profit December-half to December-half, off the back of an 8 per cent-plus leap in home loans – in what was, clearly and undeniably, the sweetest time to be a bank in living memory.

Are you kidding me? Able to ‘generously’ hand out $500k and $600k loans at just 2 per cent interest, with a never-ending queue of people lining up?

But, that was yesterday. What happens in the world in which first the Fed and then, belatedly, the RBA starts raising rates, so the ‘free money’ dribbles away?

There are two big questions for the CBA (and all the banks) relevant to you.

When does it start paying some sort of interest on its deposits?

When does it raise its core variable rate owner-occupier home loan rate?

On the latter, Comyn refused point blank to commit to me to not raise ahead of an RBA rate hike, citing regulatory prohibitions on ‘signalling’.