CBA’s ‘politically unpalatable’ repricing may not be enough

In a research note this week, Morningstar analysts David Ellis predicts rising competition will lead to a steady decline in NIMs over the next five years to 2.08 per cent. CBA’s fiscal 2017 NIM is currently sitting at 2.10 per cent, down from 2.14 per cent in fiscal 2016.

“Pressure on NIMs is coming from higher funding costs and intense competition for lending, particularly residential home loans,” Mr Ellis said.

“NIMs are expected to continue to trend down caused by increased volatility in funding markets, strong competition for new lending and deposits, and historically-low interest rates reducing income on capital and high-quality liquid assets,” he said.

“Recent loan and deposit repricing will help margins, but more (politically unpalatable) out-of-cycle repricing may still be required.”

CBA’s latest financial results, released last week, show that for the calendar year 2016, the proportion of new investor home loans being written in Australia grew by 6 per cent.

The profit announcement for the half year ending 30 December 2016 shows that while investment home loans as a proportion of the home loan portfolio in Australia were holding steady at 33 per cent, the number of new business investment loans grew by 4 per cent between June 2016 and December 2016.

Further, the amount of new investment loans being written between December 2015 and December 2016 grew by 6 per cent (to 37 per cent).

With the rise in investor home loans, the proportion of owner-occupied home loans dropped to 62 per cent (from 66 per cent as at December 2015, and from 65 per cent from the prior half year).

APRA banking statistics show that CBA’s total Australian home lending increased by 7.5 per cent in the year to 31 December 2016, exceeding the all-bank total growth of 7.1 per cent.

“We expect total lending growth to slow to around 5.5 per cent by end of fiscal 2021,” Morningstar’s Mr Ellis said.

He added that approximately 33 per cent of CBA’s total funding is from wholesale funding markets, exposing the group to higher wholesale funding costs if global markets suffer another credit crisis.

However, Mr Ellis pointed out that since 2008 CBA has mitigated this risk by increasing the proportion of customer funding.

“The bank also retains the option to reprice the loan book, though this would be unpopular with customers,” he said.

[Related: Major bank sees investor lending rise by 6%]