Norris says re-pricing a work in progress

Commonwealth Bank chief executive Ralph Norris was happy to acknowledge yesterday that the bank had benefited from a "flight to quality" in the banking market, as customers gave more of their business to the big, highly rated institutions.

In its 2008/09 financial results announcement the bank reported that it had a 30 per cent increase in personal account openings, 21 per cent growth in its home loan balances (against system growth of seven per cent) and 16 per cent growth in retail deposits.

But Norris was quick to point out that it was not simply a matter of being the default bank. Commonwealth has priced products like home loans competitively and worked hard on the standard of service in its branches and the broker channel.

He said that three years ago the standard of service in the branches was pretty ordinary and it had come a long way since then. Online services have also been upgraded.

Norris also pointed out that the increased flow of business that has resulted from the global financial crisis is a mixed blessing.

Lower margins and higher impairment expenses mitigated half the earnings gain from the big increase in home loan balances.

And much of the benefit of higher deposits was negated by pricing. Deposit margins decreased 24 basis points due to price competition and the fall in the official cash rate.

Much of the improvement in the net interest margin - up from 2.02 to 2.10 per cent over the year and up to 2.16 per cent in the second half - was due to the impact of a "replicating portfolio", a long-term hedge that contributed 16 basis points to the margin.

Norris said he was looking to do more loan re-pricing during the coming year. Only about 25 per cent of the business loan book has been re-priced for risk.

Home loans rates will be subject to review outside changes to the official cash rate.

Norris said: "There is no doubt that the official cash rate has become less significant as an indicator for base rates. The increases in our cost of funds from wholesale and offshore funding are not seen in official cash rate movements.

"We will continue to re-price when necessary. We have to act commercially and do what is right for the business."