Commonwealth Bank business arm puts aside funds as it prepares for economic downturn

Commonwealth Bank has created a watchlist of at-risk companies and assembled a war chest of provisions to prepare for an economic downturn.

Commonwealth Bank has created a watchlist of at-risk companies, including across the construction, retail and commercial property industries, and assembled a war chest of provisions to prepare for an economic downturn.

The bank’s business group executive, Mike Vacy-Lyle, said the lender was preparing for the worst when it put aside an additional $231m in loan impairment provisions in its latest set of results. That took the unit’s total provisions for loan losses to $263m.

Mr Vacy-Lyle noted that, while it had been “a particularly good ­environment” for the business bank in recent years, with unprecedented economic support and low rates keeping many small and medium operations out of insolvency, that was expected to change.

“We have increased our provisions across the business bank. We did that to normalise the through-the-cycle bad debt experience we think we should be having, notwithstanding we are seeing quite a benign credit environment,” he said.

Mr Vacy-Lyle said commercial property and construction businesses were of particular concern to CBA as the economy slowed.

The bank recorded a 72-basis-point increase in troublesome and impaired assets across its construction lending book. That took total troublesome and impaired assets to $467m at the business bank, up from $370m recorded in June.

There was a jump of 11bps to $693m in troublesome and impaired assets in commercial property. “This is on the back of the supply chain challenges we saw in 2021 and 2022,” Mr Vacy-Lyle said. “Some of the provisions are against specific businesses and forward adjustments.”

CBA also announced an increase of 8bps in troublesome and impaired assets in retail to $270m, with Mr Vacy-Lyle noting the bank was concerned about discretionary retailers with a stock overhang from the pandemic.

“We are watching the sector with caution and spend a lot of time reaching out to our business customers and having conversations in advance,” he said.

Mr Vacy-Lyle said CBA would lend on a case-by-case basis to customers it was concerned about. “Sometimes we put money in to help them through a difficult period,” he said.

“We try not to take a broad sectoral view because there are good businesses even in challenged sectors.”

Mr Vacy-Lyle said CBA would look to end its relationships with bad customers, but noted its exposures in commercial property were in the A and B grade office sector. “We’re still looking at opportunities to grow in industrial property,” he said.

His comments come as the business bank notched up a record contribution to the group’s profits. CBA has been seeking to gain a bigger share of the business lending market, as it aims to dent the dominance of National Australia Bank.

CBA reported a record group interim cash profit of $5.15bn last week, with the business bank recording a $1.92bn profit as part of the result. The business division posted a 31 per cent jump in earnings, compared to the first half last year.

This came on the back of a 13 per cent increase in business lending, in a move Mr Vacy-Lyle said was proof the bank’s technology transformation was delivering.

“We’re starting to live up to the potential we should have,” he said. “We’ve started to live up to that real strong franchise in ­retail.”

CBA’s business bank has lagged the dominant retail bank, the nation’s biggest home loan lender, paling in comparison to the mortgage machine the bank has built a reputation on.

Mr Vacy-Lyle said while CBA was commanding 26 per cent of the business transactional banking market, it only had 18 per cent of the lending share.

“We want to bring a lot of that customer lending home,” he said.

CBA has invested $600m over three years into technology and staffing.

Mr Vacy-Lyle, who joined the bank in February 2020, said the business bank was now generating 4300 new business accounts a week, as the bank’s retail customers hitched their small business operations to the bank.