Speaking at the media briefing for the bank’s half year results, CBA chief executive Ian Narev said that the recent changes to investor lending were made “primarily, with the importance of staying within regulatory benchmarks”.
The bank’s new financial results show that for the calendar year 2016, the proportion of new investor home loans being written in Australia grew by 6 per cent, nearing APRA’s 10 per cent speed limit on investment lending growth.
The bank has since suspended the acceptance of new refinance applications for investment home loans and announced that it will be increasing rates on its interest-only mortgages for investors by 12 basis points – bringing the standard variable rate for these loans to 5.68 per cent per annum.
When asked whether the move on interest rates and restrictions on new refinances was a move to mitigate a potential fall in house prices – especially in apartment prices on the east coast of Australia – Mr Narev was quick to assure that they were not.
The CEO commented: “A critical part of how we originate loans is to not assume either that interest rates or property prices today will necessarily be the same in a couple of years, because these are commitments that people make for the long term. So, we are conservative with the loan-to-value ratios, we add buffers to servicing standards. We, at the Commonwealth Bank, actually insure pretty much all loans with a loan-to-value ratio of over 80 per cent with Genworth. But underlying that as a business, and as a management team, and as a board, we spend a lot of time modelling how the bank will perform in times of greater stress.”
Stress test scenario represents “plausible commodities-led recession”
Mr Narev highlighted that one of these items of “greater stress” is “a rapid and significant fall in property prices”. For example, the bank has a three-year scenario of cumulative 31 per cent house price decline, a peak 11 per cent unemployment level, and a reduction in the cash rate to 0.5 per cent. In this test, total net losses after LMI recoveries over the three years would be $2.29 billion.
The investor report for the half year results reads: “[The] stress test scenario represents a sever but plausible commodities-led recession.”
Speaking at the media briefing, the CBA CEO commented: “I can’t pretend it [the stress test scenario] would be great for the bank. It certainly wouldn’t be good for a lot of customers, but people can take comfort in the fact that we have remained strong in downturns before and we make sure we manage our credit risk to ensure we can do that again, if that occurs.”
Despite these comments, the bank's chief financial officer, David Craig said that the bank's outlook at the moment was "very benign".
He expanded: "Certainly arrears are down across the board on consumer areas and while we pointed out a couple of areas that people are concerned about (mining towns in Western Australia, New Zealand dairy, apartment development - little hotspots that people are watching), overall, we're very comfortable."
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.