Commonweath Bank wary of bubble as profit hits $4.48bn

Commonwealth Bank chief Matt Comyn is keeping tabs on the housing market’s rebound to monitor any signs of a price bubble.

Commonwealth Bank CEO Matt Comyn. Picture: AAP

Commonwealth Bank chief executive Matt Comyn is keeping tabs on the housing market’s rebound to monitor any signs of a price bubble, as a recovery in loan applications and house prices gathers momentum.

CBA expects annual national house price growth of about 6 per cent, which may be higher in Sydney and Melbourne.

Asked if current conditions could spur an asset price bubble in 12 to 18 months, Mr Comyn told The Australian: “As we get a combination of a go-faster acceleration, particularly more investors coming into the market and an increase in credit growth, that’s problematic over the medium to long term, so we will watch that closely.

“The housing market rebounded strongly toward the back end of last year, particularly in Sydney and Melbourne, with Melbourne now slightly above the peak and Sydney about 5 per cent below the peak.

“We see the market activity in terms of listings and turnover starting to pick up. We haven’t seen a big increase in credit growth.”

Mr Comyn noted that the investor part of the housing market had only seen “a modest” recovery so far.

His comments came as CBA’s home loan growth — which printed at 1.5 times the sector’s growth rate — saw the bank report a better-than-expected $4.48bn interim profit from continuing operations. Higher net interest income helped offset lower fee revenue and a $100m hit from bushfires and drought.

The bank’s shares rallied 4.1 per cent to $88.18 on Wednesday as investors cheered the result, despite a 4.3 per cent drop in net cash profit for the six months to December 31. The stock finished the session at close to a five-year high.

Mr Comyn expects economic output this quarter will be weighed down by the catastrophic bushfires and concerns about the spread of the coronavirus, before growth improves in the second half of calendar 2019.

“In the second half of this calendar year the growth prospects will be better,” he said, noting that there was typically a rebound in economic activity following natural disasters.

“Obviously it’s a very dynamic environment at the moment and we are all watching the economic data, whether that be consumption, obviously the labour market, very closely.

“On the coronavirus it’s very much going to be a sense of how quickly it’s contained and how that weighs more broadly on sentiment … there will be some larger international business that may have (their) supply chain interrupted.”

A new Moody’s Investors Service report on Wednesday warned that a prolonged outbreak of the coronavirus would hurt the asset quality and profitability of banks in the Asia-Pacific.

“If the outbreak intensifies and the disruptions stemming from it are not contained in the next few months, we expect negative impact on banks in Asia-Pacific through various channels,” said Eugene Tarzimanov, a senior credit officer.

The report said banks could be affected through a decline in travel and tourism, lower consumption, supply chain impacts, or a drop in financial markets or commodity and property prices.

CBA’s home lending rose 4 per cent in its first half compared to the same period a year earlier, outpacing the industry average. Business lending increased 3 per cent.

The bank’s net interest margin, which reflects what the bank earns on loans minus funding and other costs, edged up one basis point to 2.11 per cent, helped by lower funding costs and mortgage pricing decisions.

Australian Foundation Investment Company’s Geoff Driver said the profit result showed CBA had the “better franchise” of its main rivals.

“In this context, and in terms of the economic environment, it’s a reasonable result,” he said.

Opal Capital Management portfolio manager Omkar Joshi labelled CBA’s earnings a “good result”.

“They’ve actually maintained their margin, which is positive. But the outlook (for CBA) remains the same.

“Some of the other banks have had their own challenges to deal with in the housing market and on the regulatory front,” Mr Joshi said.

CBA did caution that it expects further official interest rate cuts by the Reserve Bank will lead to a 5 basis point decline in its net interest margin in the second half of this fiscal year, and a 4 basis point drop in 2021.

Mr Comyn expects total credit growth across the economy to print as high as 3.5 per cent this fiscal year and between 3.5 per cent and 5.5 per cent in 2021.

He said CBA anticipated its mortgage growth relative to the rest of the sector would moderate as other banks lifted their game on processing, approval and turnaround times.

When quizzed about why CBA was typically taking three weeks to pass on rate cuts to mortgages, Mr Comyn said he was open to making changes to that timeline but pointed out that when official rates rose customers also received many weeks notice.

The bank’s accounts showed deposits accounted for 71 per cent of its funding as total deposits rose 2.8 per cent in the first half compared to a year earlier.

Still, operating income of $12.4bn printed flat, reflecting a tough operating climate, although troublesome and impaired assets were stable.

Operating expenses grew 2.6 per cent to $5.4bn, and Mr Comyn said CBA wanted to home in on cutting costs.

“There is clearly much more to do there.”

The first-half dividend was $2, flat on the interim payment in 2019, and CBA’s return on equity was 12.7 per cent.

CBA’s customer compensation and program costs edged up slightly to $2.2bn, from $2.17bn six months earlier. The refund tally stands at $630m.

CBA said it had initiatives under way for 23 applicable recommendations from the Hayne royal commission and also had to meet some of the tougher milestones set out by Promontory in a remedial plan. That plan followed an anti-money laundering scandal which cost the bank $700m in a settlement with Austrac.