Commonwealth Bank boss Matt Comyn is alert but not alarmed by the rapidly rising interest rate environment despite what he sees as a quadrupling of the impact on borrowers by December, when the \u201cpeak rates\u201d are expected to hit.<\/p>\n
It\u2019s fair to say investors are also alert but a little more alarmed about what this rising interest rate stress means for the bank\u2019s credit quality.<\/p>\n
But for CBA, which delivered a positive earnings result on Wednesday for the 2022 financial year, the key to its relatively relaxed attitude is an expectation that while all customers will feel a financial punch, for the majority it won\u2019t be a knockout.<\/p>\n
Comyn also solved the head-scratching riddle of why, despite four rate rises in as many months, consumers have shown a good deal of spending resilience.<\/p>\n
There is a significant lag, he says, between the Reserve Bank raising the cash rate and banks increasing customers\u2019 interest rates and then the customers actually starting to pay those higher rates.<\/p>\n
Thus, the force of the May and June rate increases (25 basis points and 50 basis points respectively) has hit, but July is only hitting now and the August rate rises have yet to impact borrowers.<\/p>\n
So borrowers are now just digesting the interest rate entree – the rest of the degustation rate meal will be served over the next five months by which time, as Comyn explains it, the aggregate level of repayment increase will quadruple.<\/p>\n
CBA is working off the assumption that the Reserve Bank\u2019s most likely terminal interest rate (where it will stop raising in this cycle) is 2.6 per cent – lower than the market is expecting – and suggests another two rises (one of 50 basis points and a second of 25 basis points).<\/p>\n
But CBA is relying on the profile of its home-loan lending book for its degree of comfort around credit quality.<\/p>\n
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CBA chief executive Matt Comyn – alert but not alarmed.<\/span>Credit:<\/span>Michael Quelch<\/cite><\/p>\n For instance, about 40 per cent of borrowers is on low fixed interest rates. Only a small portion of these loans will come to term this year. The bulk of these fixed loans roll off in a year to 18 months, which is when these customers will feel the full onslaught of higher rates. And there remains a sizable rump that rolls off in 2024 – by which time there is a likelihood the RBA would have begun easing rates again.<\/p>\n Add to this the fact that 78 per cent of home loan borrowers are ahead with their payments and a third of customers are two years ahead.<\/p>\n But there is also 26 per cent who are less than three months ahead – a buffer that could be quickly eroded with rates rising.<\/p>\n In total, CBA mortgage customers have $64 billion sitting in offset accounts – $19 billion more than there was before the COVID-19 pandemic.<\/p>\n Over the past year, the bank has also increased its serviceability buffers such that new borrowers will need to demonstrate an ability to service a loan with an 8.3 per cent interest rate.<\/p>\n In addition, the average home-loan size has fallen from almost $400,000 to $375,000 in the space of six months.<\/p>\n That said, the proportion of applicants borrowing at capacity has risen slightly but remains at a relatively low 8.7 per cent. The remainder have additional capacity to borrow.<\/p>\n And the biggest group of home loan borrowers are those earning between $200,000 and $500,000, and within that band, more was lent to investors than owner-occupiers.<\/p>\n At June 2022, 0.4 per cent of the amount as mortgages were in negative equity – which means the amount of the loan is greater than the value of the property it is secured against. Most of these come from West Australia.<\/p>\n While this has been falling and, as such, is a positive, the continued decline in house prices, expected to be about 15 per cent from peak to trough, will result in an increase in negative equity. And more than half of the value of home loans are sitting at a loan-to-value ratio of less than 60 per cent, which means borrowers have a comfortable equity buffer.<\/p>\n This explains why the level of arrears has been trending down over the past two years.<\/p>\n That said, the numbers provided by CBA are a snapshot of where it is today.<\/p>\n By the time we reach peak rates, the picture won\u2019t look as rosy for borrowers.<\/p>\n CBA said it has provisions to deal with what it anticipates will be the most likely scenarios around rates, economic growth, the decline in the value of housing and an increase in unemployment.<\/p>\n Over the coming months, the economic picture will become clearer as will the degree of fallout from higher rates and a slower economy.<\/p>\n The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. <\/i><\/b>Sign up to get it every weekday morning<\/i><\/b>.<\/i><\/b><\/p>\nMost Viewed in Business<\/h2>\n
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