CBA positioned to weather the coronavirus storm

CEO Matt Comyn. Picture: John Feder

Matt Comyn has positioned Commonwealth Bank as well as could be expected for the coming coronavirus storm.

The underlying business is performing soundly, with market-share growth in home lending and household deposits only producing flat interest income in the March quarter because volume gains were offset by an industry-wide erosion in margins.

Sure, the key common equity tier one capital ratio was a bit lower than expected at 10.7 per cent.

But that was after CBA absorbed a 114 basis-point hit from the $3.5bn interim dividend (79 basis points), along with a $1.5bn COVID-19 provision and $135m in remediation costs.

A 30-40 basis-point rebuild is on the way after the sale of a majority stake in Colonial First State, which will yield $1.7bn in cash proceeds.

The market’s real concern, however, is the heavy turbulence that lies ahead.

Comyn is no different from his peers, banking on a sharp contraction in gross domestic product in the June quarter.

“So the period that we’re in now is going to be very challenging,” the CBA chief told this column.

“We’ll see a significant impact on incomes from the number of people who are unemployed or otherwise on JobKeeper, and we expect the labour participation rate will contract quite sharply.”

CBA’s provisioning drew on a number of scenarios, including the Reserve Bank’s forecast earlier this month of a 6 per cent contraction in GDP in 2020 and an average unemployment rate of 8 per cent which peaks at 10 per cent.

Also thrown into the mix were baseline and prolonged downturn scenarios developed by CBA.

In the milder version, house prices were forecast to fall by 11 per cent, rising to 32 per cent in the prolonged downturn.

The latter scenario produced GDP contractions of 7.1 per cent this year 0.8 per cent in 2021, matched with average unemployment rates of 9 per cent and 8.5 per cent.

Cash profit, organic capital

CBA continues to make a cash profit and generate “strong” levels of organic capital under all scenarios, according to chief financial officer Alan Docherty.

Some parts of the economy will perform better than other, more vulnerable parts.

The big swing factors will be the success of plans to reboot the economy, and the ongoing suppression of the virus.

Right now, however, there’s a strange feeling of some kind of calm before the storm.

Comyn said CBA had “very strong” deposit growth in March and April, and home lending volumes were “surprisingly robust”.

“Our operational processes have performed well and there’s been quite a lot of refinancing activity and customer switching into fixed rates, but I don’t expect that to continue,” he said.

“Realistically, given the impact of what’s going to flow through the economy, we’re expecting a contraction or gradual slowing in credit growth, and some individual sectors of the economy are going to struggle for some time.”