“Conditions have clearly changed from what we expected in February,” he told this column Thursday morning after delivering the bank’s third-quarter business update (more on that later). ).
But the speed with which consumer expectations are changing also gives Comyn confidence that its Uber driver’s concerns about eight rate hikes may go unfulfilled.
The ABC’s view is that rate hikes of four quarters of a percentage point – so 100 basis points instead of the 200 basis points that many economists predict “will do their job to really cool demand in the economy.” ‘national economy’.
“Our view is that we won’t need that much tightening,” Comyn says.
There are a few factors that play into this view.
One is inflation, which Comyn says is a lagging indicator and should start to decline in the second half of the year. Another is that Australia’s high levels of household debt could also mean that rate hikes bite faster and harder than the market expects. Moreover, the impact of the waves of fiscal stimulus seen during the pandemic years is also starting to fade.
But Comyn argues another key factor is the structure of the Australian mortgage market, where variable loans are much larger than in other markets; This means that most borrowers feel the impact of rate increases almost immediately.
Time will tell if Comyn and his economics team are right on the RBA rate cycle, or if the consensus among economists prevails.
Nonetheless, Comyn believes consumers are well positioned to weather 100 basis point increases and business customers also remain in good shape; Comyn says businesses are widely concerned about consumer health, labor shortages and rising input costs, but they still see good demand and are much less sensitive to rising rates than households. .
He also points out that the rate hike is providing some relief to long-suffering savers. When Comyn visited CBA’s Pacific Fair branch on the Gold Coast last Saturday morning, staff said they ‘screamed with delight’ at the thought of telling term deposit customers that their rates were finally heading towards the North.
While the rate hike is making life harder for CBA customers, it is helping to improve the bank’s margins, which fell further in the March quarter due to continued pressure from higher funding costs, l tilt towards lower-margin fixed loans seen in recent years and contests.
“Obviously that starts to turn around when we enter a cycle of rising rates, which we certainly are in, and we expect that to provide a tailwind to net interest margins, in the first half of particular of our fiscal year 2023,” said Comyn.
But there are a few variables to consider here, the most important being competition.
And while the March quarter numbers don’t tell the investor much about what’s to come given how quickly the external environment is changing, they do contain some clues as to how Comyn is approaching this. next phase from a competition point of view.
Overall, the result for the March quarter was essentially stable. Cash profit of $2.4 billion was flat on average for the first two quarters of its fiscal year. Revenue was essentially flat — down 1% to $12.2 billion, but up 1% when factoring in the number of days this quarter. Spending was – you guessed it – basically flat as well, falling 2% overall, or 1% excluding remediation costs (which continue to fall).
As has been the case for the past few years, CBA had to work very hard to stay put and even added full-time staff during the quarter so that it could “deliver additional volumes and execute on strategic priorities”.
But while volume growth was respectable – home loans grew by 8.5%, for example (in line with the banking system as a whole) while business loans grew by 12.6% (or 1.5 times the system as a whole) – Comyn was ready to gently take its foot off the pedal as it balanced growth and profitability.
Competition in the mortgage market remains intense, as ANZ and Westpac try to recover lost ground and smaller players fight for their share. But Comyn says the CBA is seeing loans underwritten below the cost of capital, and it’s just not willing to go there. “It’s obviously business that we’re happy not to originate and match,” he says.
Similarly, CBA withdrew from intense competition in the fixed rate market; it was the first to raise fixed lending rates late last year and rose six times between October and February. It also weighed on lending volumes a bit, but Comyn is happy to give up some ground here too.
Comyn thinks the level of competition in the market may ease in the coming months, which is perhaps unsurprising given that some players appear to be underwriting mortgages that are or are close to onerous.
That should allay fears among some banking analysts that the margin boost due to the rate hike will be reversed.