COVID-19 to cost CBA an extra $1.5bn

In its March 2020 trading update, the Commonwealth Bank of Australia (CBA) revealed that a new $1.5-billion credit provision had been raised for the potential loan losses due to the impacts of COVID-19 on borrowers.

The forward-looking adjustment means that total provisions now stand at $6.4 billion, representing a coverage ratio of 1.65 per cent to total credit risk weighted assets.

In its update, the bank outlined that given the “unprecedented set of circumstances which are still unfolding and evolving”, a definitive assessment of the longer-term outcomes of the COVID-19 pandemic and the consequent economic and societal impacts is “difficult” at this stage. 

“The forward-looking adjustment has been determined based on a range of plausible economic and industry sector stress factors, taking into account the mitigating impacts of government and industry assistance packages and support, including loan repayment deferral arrangements,” the bank said.

“The bank’s lending portfolios continue to be monitored closely, with detailed portfolio stress testing to form the basis for ongoing reassessments of provisioning levels as the situation evolves.”

According to the update, the loan impairment expense was $1.6 billion in the quarter, or 80 basis points of average gross loans and acceptances, inclusive of the additional COVID-19 provision. 

Consumer arrears were seasonally higher in the quarter, but lower year-on-year. Home loan arrears came in at 0.63 per cent for the quarter ending March 2020, down from 0.71 per cent the year before. Credit card and personal loan arrears also dropped.

However, troublesome and impaired assets were higher at $8.1 billion, reflecting “seasonally higher consumer arrears and continued pockets of stress in certain sectors, including discretionary retail and agriculture”.

Overall, home loan growth remained above system, particularly driven by new business volumes in the quarter, whereas loan application volumes were 10 per cent higher than the same quarter last year, driven by “stronger customer demand for home loan refinancing in a low rate environment”.

CBA noted that weekly application volumes have trended lower in April and May, which the bank attributed partly to “government COVID-19 restrictions impacting open house and auction activity”.

Overall, mortgages still account for around 69 per cent of total lending for the bank (followed by business lending at 16 per cent).

Since launching its COVID-19 financial assistance package, which includes loan repayment holidays for up to six month (capitalised into the loan), the bank has reportedly received repayment deferral requests on approximately 144,000 home loans, 71,000 business loans, and 25,000 personal loans. While the major bank did not reveal how many of these had been granted, it outlined that the total balance of mortgage deferral requests was $50 billion.

The big four bank has also announced that it has entered into the sale agreement for 55 per cent interest in its superannuation and investment business Colonial First State (CFS) with global investment firm KKR.

The transaction implied a total valuation for CFS on a 100 per cent basis of $3.3 billion, which will result in CBA receiving cash proceeds of approximately $1.7 billion, making for a post-tax gain of $1.5 billion. The post-tax gain figure included separation and transaction costs for the bank of around $180 million.

[Related: Deferrals, redraws to offset decline in volumes: RBA]