CBA emerges from Covid even more dominant

CBA went into Covid as easily the dominant big four bank, and it has emerged from the last two-and-a-half years of craziness and into the new world of rising interest rates in even more dominant, stronger and, now, aggressive shape.

CEO Matt Comyn says, yes, the rising rates had hit consumer confidence and it was showing up in customer uncertainty.

But as at mid-August there was no evidence yet of any negative impact on either the broader economy or CBA’s banking activity.

With the first rate rise in May, there was clearly a lagged effect that would flow through confidence first and then into actual consumer and business decisions.

It was hard to find a less-than-impressive number in all the CBA detail. That also went for the ‘touchy-feely’ subjective metrics like ‘net promoter scores’ and ‘MFI’, or Main Financial Institution – both, where CBA pulled even further away from its peers.

What should be particularly disturbing for them, the competitors, is the way some of their sectoral metrics were going seriously south versus CBA.

Some key numbers capture CBA’s dominant franchise and the way that dominance creates a positive feed-back loop into superior operational and financial performance. To me the best indicator, which plays critically into CBA’s ability to chase or defend market share and boost profitability, is the growth of its consumer and now also business deposit base. In 2008, just before the GFC, it got 55 per cent of its funding from deposits. That was impressive then. That combined with CBA’s dominant position in the home loan market to drive its then-20 per cent or so shareholder return.

CBA CEO Matt Comyn. Picture: Adam Yip

Last year deposit funding was up to 73 per cent; it edged slightly higher to 74 per cent this year. This is the cheapest and most stable funding – especially in the years of zero rates. CBA also picks up a few basis points advantage, getting its deposits at slightly lower rates than its competitors.

Although obviously, it ‘lost’ that advantage over the Covid years when they were all basically paying the same zilch. Rising rates will now bring it back.

The CBA statement sort of captured this with: margins were “expected to increase in a rising rates environment”.

It’s a bit of a two-edged sword. That’s the positive of rising rates; the negative is increased potential for loan losses and hits to activity, to both business and home loan lending. But again, the detail in the CBA numbers puts to rest any immediate threat of serious mortgage stress.

The most telling number? As at June 30, only 0.4 per cent of the home loan book – both owner-occupied and investment - had ‘negative equity’, where the loan balance exceeded the estimated market value of the property; and in half the cases the negative equity was marginal.

Yes, property values are likely to fall further.

But even then, the vast majority of borrowers will still have positive equity because they’ve experienced much, much larger value increases.

As well, as the CBA detail showed, most borrowers were either well ahead on their repayments, were paying more than current interest rates required, had strong offsetting cash balances, or some combination of all three.

CBA also stepped back ever so slightly from chasing or competing for home loan share over 2021-22, lending marginally under-system, precisely as property prices were peaking.

At the same time it went after business lending, and that delivered a huge - $24bn - surge in low-cost business deposits, adding $183bn in total to the $351bn of low-cost consumer deposits, with its own feed-back loops.

All of this is being knitted together under CBA’s market leading digital bank offer.

It appears streets ahead of the rest and of one of the other big banks in dire particular.