CBA defensive on lending standards

Ian Rogers
The sensitivity to the charge that property prices in Australia are over valued and thus that prices must fall, to the detriment of bank earnings, informs a presentation being used in an offshore investor roadshow by management of Commonwealth Bank. CBA published the presentation material yesterday.

The themes of the roadshow are similar to those canvassed over recent months by the Reserve Bank of Australia, namely that measures of affordability, such as ratios of house prices to income, are treated simplistically.rba_bonds_graph_20100910

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A particular target of the CBA roadshow is the international commentary - fuelled by investors such as GMO and its investment head Jeremy Grantham, investment banks such as Morgan Stanley and its chief economist Gerard Minack and perhaps also The Economist magazine - all of whom share an analysis that property prices in Australia are likely to tank.

Drawing on data compiled by RPData and Rismark, CBA argues that the house price to income ratio in Australia, at 4.3, is similar to many other countries. And while the ratio is higher for major cities, at 5.6, this is a lower ratio than for many other global cities.

CBA points out that 50 per cent of household debt is held by the top 20 per cent of income earners and 75 per cent of debt by the top 40 per cent.

The bank said that under a "high stress" scenario it would incur losses on home lending of around $2.2 billion, or less than one per cent of its book, and with $1.5 billion of these losses covered by mortgage insurance.

CBA did not point out that its position in the home loan market is now much more dominant, with the Australian Bureau of Statistics data published this week showing that the market share of banks, in home lending, is now more than 91 per cent.

While there are some props to competition by smaller lenders (such as investment by the Australian Office of Financial Management in mortgage-backed securities), that alternative source of funding is not likely to claw back much market share from banks.

Guy Debelle, assistant governor of the RBA, in a speech in Sydney yesterday said that while funding from the debt market for those funders reliant on securitisation was
now "cost effective for the issuers … the shift in relative pricing suggests that the asset-backed segment is, and is likely to remain, a smaller share of the market than it was prior to the crisis."

Banks thus have plenty of pricing power in the home loan segment to moderate any losses should property prices fall.