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On Wednesday (9 August), the Commonwealth Bank of Australia (CBA) released its financial results for the financial year ending 30 June 2023 (FY23), revealing that while arrears and hardship levels remain low, they will likely start climbing this financial year.
According to the major bank CEO Matt Comyn, this is because about a third of rate increases is still to be felt due to delays in rates being passed down.
Over the financial year, the cash rate rose by 2.75 per cent (and have risen a further 50 basis points so far this financial year), but Mr Comyn flagged that borrowers have “only felt about two-thirds of the current cash rate increases” so far, given the delay between these interest rate hikes being passed on and the fact that a large proportion of borrowers are yet to roll off their fixed-terms (with the peak of CBA’s fixed-rate cliff hitting in this half of the calendar year).
While the Australian economy has proven resilient in the face of slowing growth and increased financial stress on households and business, Mr Comyn said there were “signs of downside risks building as rising interest rates have a lagged impact on mortgage customers and other cost-of-living pressures become a financial strain for more Australians”.
Indeed, chief financial officer Alan Docherty told shareholders that increases in arrears are expected as “pressure continues to build on household disposable incomes”.
The bank estimates that approximately 21 per cent of a borrower’s pre-tax income is currently needed to meet the median monthly repayment (up from 15 per cent when the cash rate was at its emergency low setting of 0.10 per cent).
The bank suggested that the average minimum monthly repayment is about $1,775 at the current cash rate.
Mr Comyn said: “Even though wages are rising, the combination of higher inflation and higher interest repayments has meant that real household disposable income has fallen by around 5 per cent year on year.”
Offset balances continue to rise
Despite the rise in rates, the arrears and hardship levels were still low.
Indeed, the financial results show the amount of money stored in offset accounts continued to rise in FY23.
Offset balance growth for the group was up 53 per cent on pre-pandemic levels (June 2019), totalling $69 billion as at June 2023.
Despite being $1 billion down on December 22 levels, the figure is $5 billion up on last year’s spot balances and is the highest it’s been for the past four financial years.
Moreover, 90-plus day arrears also continued to trend downwards, falling to 0.47 per cent in June 2023. Pre-COVID (FY19), 90-plus day arrears hovered around 0.68 per cent.
However, 30-plus day arrears have increased to 0.92 per cent (from 0.82 per cent last year) but still remain long-term averages.
Similarly, 78 per cent of the group’s home loan borrowers continue to be ahead on their repayments – with a third more than two years in advance. On average, borrowers are ahead by 29 monthly payments (including offset), according to the group. This has fallen from the past two financial years, when it was 36 payments in advance.
Speaking to investors on a briefing call on Wednesday morning (9 August), Mr Comyn commented: “While we know that there are some customers that are finding the current environment very challenging, we’re still seeing only a small number of customers behind on their repayments. Both our 30-plus and 90-plus day arrears remained at historic lows because customers are taking practical steps to adapt to the higher rate environment.”
The majority of arrears are in Northern Territory and Western Australia, while most impaired mortgages are in NSW and Western Australia. According to the bank, the low arrears and impairments can partly be attributed to the fact that there has been a strong labour market and large savings buffers built up over the pandemic.
Hardship cases are also down 27 per cent on pre-COVID averages, with CBA outlining that only 0.02 per cent of home loans have been repossessed – down from 0.03 per cent in FY20.
Mr Comyn later added: “We are proactively contacting every customer coming off a fixed-rate mortgage to discuss options and provide practical support and are extending support to our business customers.”
According to the bank, $52 billion in fixed-rate loans are coming off between July and December 2023 (1H24), followed by $25 billion in 2H24 and $26 billion in 1H25.
Most borrowers are now choosing variable (95 per cent) as expectations rise that the cash rate may be near its peak. Just $4 billion of new loans were fixed in the last six months.
The bank also flagged that higher serviceability buffers and interest rates were impacting borrowing capacity – with borrowers now being serviced at a rate of 11.55 per cent (when applying the 3 percentage point buffer to CBA’s 8.55 per cent standard variable rate).
Mr Comyn concluded: “It has been an increasingly challenging period for our customers, dealing with rising cost-of-living pressures.
“Our balance sheet resilience allows us to support our customers and deliver sustainable returns for shareholders.”