Commonwealth Bank says home loan arrears are ticking higher

Australian Financial Review May 9 2018 12:21 PM

James Eyers

Commonwealth Bank's shares are trading down heavily on Wednesday after it released a market update showing weaker-than-expected revenue and costs over the third quarter.

CBA said its unaudited cash profit was $2.35 billion for the quarter to March 31, which missed analyst expectations by 8 per cent.

The nation's largest lender also said more of its customers are doing it tough, with the number of borrowers behind in their mortgage repayments rising slightly and more "troublesome exposures" appearing over the third quarter.

The market honed in on growing costs and softer revenue, as treasury and trading income fell along with fees from credit cards.

"Overall, today's update is disappointing," said Deutsche Bank analyst Anthony Koo.

CBA shares were down 3.2 per cent, or $2.33, at $71.17 just after midday AEST on Wednesday.

CBA reported a squeeze on its margin, with underlying operating income decreasing over the quarter by 4 per cent, due more home loan borrowers switching from higher margin interest-only loans to loans paying back principal and interest. CBA said that had creates to "a slight decline" in the group net interest margin. Home lending volume was up 3.2 per cent.

The pressure on margins from switching comes as banks have been put under pressure from the prudential regulator to rein in interest only lending, which is considered more risky.

Meanwhile, underlying operating expenses increased by 3 per cent, which CBA said was "driven by increased provisions for regulatory and compliance project spend".

Like the other banks, CBA is having to lift spending to respond to the royal commission, and is also having to increase spending to fix its governance compliance systems in the wake of the scathing prudential inquiry released last week. It also announced the settlement of its BBSW litigation on Wednesday, which will result in a further $25 million of remediation costs.

Meanwhile, the higher BBSW-OIS spread is increasing funding costs.

"The combination of declining revenue and growing costs has delivered 9 per cent lower core profit," said Citi analyst Brendan Sproules.

CBA said the "credit quality of the group's lending portfolios remained sound" but also pointed to "an uptick in home loan arrears, influenced by a small number of customers experiencing difficulties with rising essential costs and limited income growth".

The number of home loan borrowers more than 90 days overdue on their loan was at at 0.65 per cent, up from 0.59 per cent at the end of December.

CBA's update comes the morning after Treasurer Scott Morrison put tax cuts as the centrepiece of his budget, which will provide some relief for cost pressures building on low and middle income households.

CBA's latest numbers indicate more borrowers are struggling; it said "consumer arrears were seasonally higher in the quarter". Customers more than 90 days due on their personal loans rose from 1.21 per cent at the end of December to 1.39 per cent at the end of March, while credit card arrears also rose slightly, from 0.88 per cent to 0.98 per cent.

It also said a small number of loans had resulted in an increase "troublesome exposures", while impaired assets remained stable.

Overall, bad debts remain very low and the credit quality numbers reported on Wednesday came in better than market expectations. The loan impairment expense of $261 million in the quarter was 14 basis points of gross loans and acceptances, down from 16 basis points in the first half. CBA said it maintained "prudent" levels of credit provisioning with total provisions at $3.8 billion.

CBA said funding and liquidity positions remained strong. The balance sheet has been strengthened by an increase in the tenor of its long term wholesale funding to 5.1 years.

It's common equity tier 1 capital ratio was up 37 basis points to 10.1 per cent, but is as 9.8 per cent on a pro-forma basis, following the prudential regulator's requirement for CBA to lift operational risk capital by $1 billion after the APRA report last week. Yet the sale of CBA's life insurance operations in Australia and New Zealand, which will be completed in the December half, will lift CET1 by around 70 basis points.

CBA's updates comes after the other major banks wrapped up their interim profit results this week; over the first six months of 2018, cash profits at the four majors were down 1.7 per cent compared to the previous first half to $15.2 billion, after a combined $1.4 billion in charges were taken taken for regulatory, compliance and restructuring costs.

The third quarter CBA numbers comes after ANZ on Tuesday said it had received around $1 billion of reinsurance proceeds from Zurich following the sale of its Australian life insurance business, which had increased its CET1 capital ratio by 25 basis points.

ANZ said it would consider capital management options that "may include an additional on-market buyback of $1 billion to $1.5 billion" in shares, on top of the on market buyback of shares currently underway to neutralise the dividend reinvestment plan. ANZ said it will confirm its plans "once analysis of the various alternatives and requisite approvals are completed".