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Banks insist they’re ready to give credit where it’s due

Talk of a credit squeeze has been vastly overstated, says the banking sector — a view fully supported by the Reserve Bank.

A credit squeeze? Who, us?

As dire assessments are made that the flow of credit is turning glacial after the banks rediscovered responsible lending, courtesy of a certain royal commissioner, the line from the nation’s top home lender is that, if there’s a problem at all, it’s on the demand side.

So look at the borrower, not the lender.

Happily for Commonwealth Bank boss Matt Comyn, who controls almost a quarter of the nation’s mortgage market, Reserve Bank governor Philip Lowe agrees.

Across town in Sydney, Lowe told his audience at the National Press Club yesterday: “At the moment, banks actually want to lend.”

Despite the RBA’s intervention, this is far from a settled issue, at least from the borrower’s perspective.

The loan approval process, which should be digitised and seamless, has become fraught, time-consuming and frustrating.

As the housing bubble continues to deflate, albeit in a manageable way, there are spillover effects on consumer sentiment that flow into the real economy.

In a post-royal commission environment and ahead of a federal election, the cynics say it’s a convenient political narrative for the banks to insist that they are open for business, and that talk of a credit squeeze is massively overblown.

Comyn spent a fair amount of time yesterday trying to correct some misconceptions.

In short, he said lending policies had been stable over the last 12 months, approval rates were unchanged, the average loan size was actually increasing, borrowers were not using their spare capacity, and CBA’s volume of applications was lower.

To the suggestion that this was in stark contrast to the widespread perception of borrowers, Comyn said a lot of it reflected a much more rigorous loan application process.

Expense verification was now a more detailed exercise, with the customer called on to fill out 11 separate expense fields.

In contrast to the broker network, much of the process is automated in the branches, but even in the proprietary channel there’s a lot more prompts for lending staff to deal with.

Comprehensive credit reporting will also have an impact, with Comyn hearing of one customer who had overlooked a five-year-old store credit card with a grocery chain that was picked up as part of a loan application.

Once an application was finally lodged, however, the time taken for approval was much the same, if not quicker.

Demand for investor lending had also been curtailed by the prudential regulator’s imposition of speed bumps, which cut borrowing capacity by 15-25 per cent.

“I think it’s really important to note that 90 per cent of borrowers don’t actually borrow at the maximum,” Comyn said.

“So that 15-25 per cent is really affecting the 10 per cent.

“We’ve seen our approval rates largely stay unchanged, and more importantly we have seen a reduction from a demand perspective.”

Overall CBA’s half-year result was a solid effort, given the two to three years of hell the bank has experienced — with more to come — as a result of its self-inflicted conduct and governance wounds.

As the bank has been torn from pillar to post, it’s almost a miracle that the result looks something like business as usual.

At 10.8 per cent, common equity tier one capital was also ahead of “unquestionably strong”, as required by the prudential regulator.

Capital management options will open up after the completion of asset sales.

That said, there are concerns that momentum is weakening after a stronger first quarter, with pre-provision profit about 2 per cent lower than the consensus forecast.

The core retail division, which accounts for 48 per cent of group earnings, had a poor December half, with net profit slumping 8 per cent to $2.2 billion and revenue sliding by 4 per cent.

The division’s margin collapsed by 11 basis points to 2.6 per cent on the back of higher funding costs and lower profitability in home lending.

This more than offset stronger volume growth in mortgages and household deposits, where CBA is now growing at about 90 per cent of the wider banking system, up from 0.6 per cent in the previous half, after managing its regulatory obligations.

The challenging operating environment is exacerbated by costly customer remediation programs and the huge investment required in information technology to minimise the risk of future misconduct crises.

CBA is looking to minimise the pain to shareholders by targeting a lower, absolute cost base through highly digitised businesses.

In the short-term, though, the bank is no different to its peers — it’s weighed down by massive investment in risk and compliance, which absorbed 64 per cent of the $676 million investment spend in the December half, up from 41 per cent a year ago.

Only 28 per cent was spent on productivity and growth — down from 47 per cent in 2018.

Comyn lamented that spending to mitigate risk would remain “elevated”, refusing to even contemplate that CBA might be through the worst of its recurring governance nightmare.

Instead, the mantra was that the bank has made progress but still had “a lot of work to do”.

“I’m certainly not complacent at all,” Comyn told Four Pillars.

“I don’t underestimate the scale of the challenge.”

gluyasr@theaustralian.com.au

Twitter: @Gluyasr

Read related topics:Bank Inquiry

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Original URL: https://www.theaustralian.com.au/business/opinion/richard-gluyas-banking/banks-insist-theyre-ready-to-give-credit-where-its-due/news-story/8afb770e6f090dc021c8495c338bec06