Bank’s 27% loan impairment spike no worry for ratings agency

In a statement last week, S&P said that CBA's operating results from its banking and wealth management activities in Australia and New Zealand are “in line with our expectations at the current rating level.”

CBA last week posted a record $9.5 billion profit after tax on a cash basis, up 3 per cent from the prior year.

“Loan impairment expenses increased by 27 per cent primarily due to higher provisioning levels required for exposures to resources, commodities, and dairy,” according to S&P.

“In our view, the increase in loan impairment expenses is from a low base and, overall, the level of loan impairment expenses to average gross loans and advances remains reflective of a relatively benign credit environment.”

The ratings agency noted that CBA's customer satisfaction scores ranked top for its retail (including internet banking), business banking, and wealth management activities and was reflective of the deepening of the bank's customer relationships across the divisions for the past 10 years.

S&P said the strengthening of the major lender’s capital position reflects an $5.1 billion capital injection ahead of the increase in regulatory requirements for residential mortgages effective July 1, 2016.

“Because of the increase in the denominator, CBA's return on equity ratio on a cash basis declined to 16.5 per cent (by 170 basis points). We believe that CBA will remain well capitalised at the upper end of our adequate range — a risk-adjusted capital (RAC) ratio of 7 to 10 per cent.”

S&P expects that greater clarity on increasing regulatory capital requirements is likely to emerge toward the end of 2016 and the beginning of 2017.

“Currently, we forecast that CBA's RAC ratio would remain below 10 per cent in the next two years.”

 [Related: CBA: direct loans 'as good as they are going to get']