CBA CEO downplays stimulatory effect of floor rate cuts

In early July, the Australian Prudential Regulation Authority (APRA) made a decision to revise its home lending guidance for authorised deposit-taking institutions (ADIs).

The prudential regulator scrapped its 7 per cent interest rate floor and raised its buffer rate from a minimum of 2 per cent to 2.5 per cent.

APRA chair Wayne Byres said that the regulator’s amendments were “appropriately calibrated”, stating that a serviceability floor of more than 7 per cent was “higher than necessary for ADIs to maintain sound lending standards”.

In response to the amendments, several lenders, including the big four banks, slashed their interest rate floors to as low as 5.25 per cent.

Several analysts have observed that the changes would help stimulate demand for credit and contribute to a recovery in the housing market by boosting borrowing capacity by up to 23 per cent.  

However, speaking to the media following the release of the Commonwealth Bank of Australia’s (CBA) full-year results for the 2019 financial year (FY19), CEO Matt Comyn downplayed the stimulatory impact of APRA’s new guidance.

“We’re seeing, and we would expect to see, a rather modest effect from [the APRA revision],” he said.

Mr Comyn stated that only some borrowers would benefit from the changes, claiming that most mortgagors opt not to push the margins.  

“As we’ve previously disclosed, almost 90 per cent of borrowers don’t borrow at the maximum, so the application of where the floor [is set] impacts someone who wants to borrow at the maximum,” Mr Comyn continued.

“As you’d expect, across multiple different borrower types and circumstances, it depends on what the benefit will be from the floor. For example, if you’re an owner-occupied, principal and interest borrower, [the changes would] potentially have the greatest effect.

“If you look across the overall portfolio, it’s a relatively modest impact.”

Mr Comyn largely attributed the recently reported recovery in credit and housing market conditions to a general improvement in market sentiment.

“I think the stabilisation in house prices and the slight improvement in credit growth is probably due to a broader [improvement in sentiment] rather than the APRA changes,” he added.

However, Mr Comyn noted that the APRA revisions were “appropriate” given the record-low interest rate environment, which he said is likely to remain in place for some time.

In its FY19 results, CBA recorded home lending growth of 3.7 per cent, above system growth of 3.4 per cent.

When including its subsidiary Bankwest, CBA’s total home loan portfolio grew $16 billion from $451 billion in FY18 to $467 billion.

On a standalone basis (excluding Bankwest), CBA’s portfolio grew $14 billion from $381 billion to $395 billion. 

Overall, the group reported a cash net profit after tax of $8.49 billion, down $0.4 billion (4.7 per cent) on FY18 ($8.88 billion).

[Related: Mortgage growth offsets CBA’s profit slide]