CBA disputes home loan mortgage ‘loyalty tax’ exists

CBA boss Matt Comyn argues different interest rates make sense and disagrees there’s a ‘loyalty tax’.

Commonwealth Bank CEO Matt Comyn addresses shareholders during the Commonwealth Bank annual general meeting (AGM) in Sydney. Picture: AAP

Commonwealth Bank chief executive Matt Comyn has hit back at suggestions banks slug existing mortgage customers with a “loyalty tax”, arguing in many cases it made sense that different interest rates were charged to customers.

Mr Comyn also joined his peers at Westpac and ANZ Bank in welcoming the competition regulator’s new probe on mortgages, saying it was “a good opportunity” for the banks to put forward more information on interest rate pricing decisions.

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He disputed, though, the concept that existing bank customers were paying interest rates that are 30 basis points or more higher than discounted home loan rates designed to lure new borrowers.

“We’ve looked at the front book-back book difference and it’s been estimated at the ACCC (Australian Competition & Consumer Commission) by about 30 basis points and I think there was a Deloitte report which suggested it was higher than that,” he told journalists on the sidelines of CBA’s annual general meeting.

“It’s actually from our perspective substantially less than that.”

Prime Minister Scott Morrison this month accused the banks of “profiteering” by not passing on in full the Reserve Bank of Australia’s October rate cut, the third reduction this year. That was followed this week by the ACCC being granted authority to conduct a new inquiry into how banks price and fund their mortgages.

CBA is that nation’s largest home lender.

Mr Comyn said it was simplistic to think customers should all be paying the same interest rates on home loans.

“The other piece to it, particularly for a loan product, I’m not sure it follows that every customer should get the same rate,” he added.

“A financial institution takes into account borrower and risk characteristics so the size of the loan, the loan to value ratio, the assessment of the likelihood of the loan being repaid. We are certainly very conscious of making sure were both competitive and rewarding both new and existing customers.”

Are customers paying too much?

But consumer groups have argued that borrower inertia is leading to existing bank customers paying much more than those that seek out new deals.

Macquarie banking analyst Victor German this week estimated the worst offender on charging existing customers more than new ones was Bank of Queensland with a 62 basis point gap. His analysis — which did not include the October rate changes announced by banks — put CBA’s estimated differential at 47 basis points.

But Mr Comyn said he had revisited the issue at CBA and his estimate was much less than figures being touted.

“This is an area for the inquiry where we will be able contribute some of the facts and have an open conversation which I do think will enable us, and other institutions, to better explain what is actually happening there,” he added.

“It’s certainly something that we’ve been working on for a couple of years. As the average level of discounting has increased we wanted to make sure there weren’t unnecessary discrepancies across our customers and I think it’s quite reasonable that people want to understand how we think about that.”

Considering further disclosure

Mr Comyn said CBA was considering providing further disclosure on the topic of pricing differentials at its interim results early next year.

His comments came after investors threw their support behind CBA’s remuneration report at Wednesday’s lengthy AGM, with a vote of 92.7 per cent in favour.

Shareholders in attendance did, however, grill chairman Catherine Livingstone on issues around pay and the quantum of executive and director remuneration after CBA set aside $2.17 billion for customer compensation and related costs.

Ms Livingstone said that scrapping bonuses last year and introducing a new and tougher pay structure were sufficient measures.

“We feel adjustments we’ve made are appropriate,” she added.

CBA will revisit the topic of clawing back bonus payments from executives after the banking regulator released a proposed model for pay across the sector.

After the meeting, Mr Comyn questioned assertions that Australian banks remained highly profitable, noting that return on equity had declined since 2007.

“That return on equity is certainly much lower than Canada, its lower than the US, it is higher than the UK and Europe but I think if there is one thing we can be certain of is, the only thing worse than a profitable bank is an unprofitable one,” Mr Comyn said.

“Clearly it’s important that financial institutions are able to generate a return on equity that is above their cost of capital because that enables us to continue to grow our balance sheet effectively and make loans to both home loan customers as well as business customers.”

Given the sector had endured 57 inquiries, though, the heightened scrutiny by the ACCC did not surprise Mr Comyn.

While he doesn’t believe there are any near-term risks to CBA’s credit rating, Mr Comyn said it was a consideration as earnings and the economy remained under pressure.

“Ratings agencies look at the profitability of financial institutions and their ability to remain profitable,” he said.

“After 28 years of uninterrupted economic growth in Australia if the banking system wasn’t profitable I think that would be a real problem.

“It is really important to maintain that rating.”

Mr Comyn’s comments follow a warning from Westpac chief Brian Hartzer about the importance of the bank retaining its AA rating.

“This rating allows the bank to import funding at more cost from international investors. To lose it would increase the cost of our wholesale funding which would inevitably lead to higher interest rates for our borrowers,” Mr Hartzer said on Monday.

Mr Comyn backed that view on the implications of a negative ratings change.

“Any change to that rating, which can come from either changes to individual financial institutions or a downturn more broadly in the economy, that will impact the price we have to pay for wholesale deposits which ultimately will impact our overall funding cost and certainly has the ability then to affect customers,” he said.