Funding pressures persist as demand stirs

Commonwealth Bank chief executive Ian Narev has forecast a modest pick-up in mortgage and business lending in the coming financial year, but he warned that the cost of funds is increasing faster than banks can pass the increases on.

System growth in home lending was 5.4 per cent in the year to June, and CBA's growth was 4.5 per cent. Narev is expecting growth of five to seven per cent in the current year.

He is expecting growth of 5.5 per cent to 7.5 per cent in business lending in the current year.

At June 30, the bank had increased it standard variable home loan rate by a total of 148 basis points (outside Reserve Bank cash rate movements) since the global financial crisis. Deposit funding costs, compared with pre-GFC pricing, were up by 186 basis points, and wholesale funding costs were up 165 basis points.

On these numbers, there is a gap of 30 basis points between the increase in funding costs since the financial crisis and the out-of-cycle increases in home loan rates.

Some of this pressure is thanks to the pricing tactics of competitors.

David Craig, the bank's chief financial officer, said: "We're not interested in losing money on deposits, and at some times during the period there has been very uneconomic pricing."

The group's net interest margin fell three basis points, from 2.12 per cent in 2010/11 to 2.09 per cent in the year to June. NIM was down to 2.06 per cent in the June half.