Commonwealth Bank chief executive Matt Comyn said some home loan offers in the market are below the cost of capital.
Despite this intense competition Comyn is confident the bank’s net interest margin will pick up in the 2022/23 financial year, thanks to higher interest rates.
CBA’s net interest margin fell 18 basis points year-on-year to 1.9 per cent. The fall was due to a large increase in low-yielding liquid assets. Another factor was above-average sales of low-margin fixed rate home loans.
Speaking at the presentation of the bank’s 2021/22 results yesterday. Comyn said: “Given funding cost increases and late cycle risks, we think these offers are a bit extreme. These things don’t persist but the market will remain competitive.”
Rising rates typically expand bank margins as deposit rate increases tend to lag loan rate increases. And retail banks have a proportion of deposits that pay little or no interest.
CBA has a strong deposit franchise. It has A$855.9 billion of total deposits. Included in that is $142.1 billion of non-interest bearing transaction account deposits. While total deposits grew by 12 per cent, non-interest bearing deposits grew by 26.3 per cent.
It can rely on a steady flow of low-cost deposits. The bank’s household deposits increased by $40.9 billion, or 13.2 per cent, over the year to June and business deposits grew $23.9 billion, or 15.1 per cent.
The bank opened 1.1 million retail transaction accounts during the year, 24 per cent more than openings in the previous year and it opened 1.04 million business transaction accounts – 10 per cent up on openings in the previous year.
However, these advantages can be competed away and the recent slowdown in lending growth also presents challenges.
Another challenge is that the cost of funding from other sources has also risen. In last week’s Statement on Monetary Policy, the Reserve Bank said banks’ funding costs have returned to pre-pandemic levels, with yields on bank bonds, mortgage-backed securities and at-call and term deposits all rising in recent months.