CBA arrears down as home lending grows

Commonwealth Bank, the nation’s biggest, saw loan arrears across its consumer book fall in the September quarter.

Commonwealth Bank, the nation’s biggest, saw loan arrears across its consumer book fall in the September quarter as tax cuts and lower interest rates helped indebted borrowers resume payments.

The proportion of loans that were 90 days past due across CBA’s mortgages, personal loans and credit cards fell in the three months ended September 30, the bank’s trading update showed on Tuesday.

The update showed that unlike many of its rivals CBA saw growth in its home loan, deposit and business lending books in the quarter.  CBA’s unaudited cash earnings for the quarter fell 8 per cent to $2.3bn compared with the same period last year, but printed 5 per cent higher, excluding notable items, when compared with the average of the two quarters in its second half.

Investors and analysts welcomed signs of growth in CBA’s lending volumes but noted the bank was cautious on the outlook, given a slowdown in the domestic economy and record low interest rates.

CBA joined the other major banks in warning of a tough operating climate in 2020.

“The bank remains well placed in a challenging operating environment, characterised by global macro-economic uncertainty and historically low interest rates,” chief executive Matt Comyn said.

“Our strong capital position and balance sheet settings mean we are well placed to meet the needs of our customers, illustrated by good volume growth in our core markets of home lending, business lending and household deposits.”

His comments came as former federal treasurer Peter Costello said Australia’s monetary policy had probably run its course, as he backed calls for clearer exemptions to responsible lending laws for small business to stimulate the economy.

“The responsible lending laws are having the effect of choking credit a bit, and I notice the other day the Treasurer said exempt small business from the responsible lending laws.

“If you could put in place some measures like that, which would support the flow of credit again, I think that would be positive for the economy,” Mr Costello said.

CBA’s results showed tax and interest rate reductions were helping borrower repayment levels. The bank’s mortgage arrears dropped to 0.64 per cent, from 0.68 per cent, while personal loans fell to 1.43 per cent and credit cards 0.88 per cent.

Arrears in the personal loan book “remained elevated” due to lower growth and some pockets of stress in western Sydney and Melbourne, the update said.

CBA’s loan impairment expense was steady at 16 basis points of gross loans.

The bank did see a rise in “troublesome and impaired” assets from $7.8bn to $8.12bn as at September 30 as business exposures in retail, construction and agriculture rose.

CBA’s shares closed almost 1 per cent higher on Tuesday at $80.83, bucking a dip in the broader ASX200.

UBS analyst Jonathan Mott upgraded his CBA earnings estimates following the trading update, but retained a “sell” rating on the stock given its valuation.

“CBA is now trading on 17 times 2020 full-year earnings estimate which makes it one of the most expensive developed market banks in global history, despite a falling EPS (earnings-per-share) profile as net interest margins come under pressure from ultra-low rates and credit charges continue to slowly normalise,” he said.

Credit Suisse analyst Jarrod Martin trimmed his CBA earnings estimates for 2020 and the following two years.

“A reasonable quarterly update that benefited from a couple of tailwinds,” he said, citing factors including funding costs, fewer weather events and no new remediation during the period.

“As per the other banks we now factor in a further $300m pre-tax remediation in FY20 which we expect to be predominantly a top-up of aligned dealer group remediation.”

Excluding a benefit from wholesale funding markets, CBA’s net interest margin as at September 30 printed about 4 basis points lower at 2.06 per cent when compared to June 30. The net interest margin reflects what the banks earned on loans minus funding costs.

The September 30 CBA net interest margin takes into account two of the RBA’s 25 basis point cuts to official rates this year, but not the reduction in October.

CBA’s customer compensation and related costs printed steady in the quarter at $2.2bn in total program spend and provisions. The bank said $1.2bn related to customer refunds, of which about $600m had been paid to banking and wealth management customers to date, excluding financial planning groups under its licence.

Like its rivals, CBA hasn’t ruled out further remediation costs stemming from a string of scandals and misdeeds at the bank, which were fleshed out at the Hayne royal commission.