“Conditions have clearly changed versus what we anticipated in February,” he told this column on Thursday morning after delivering the bank’s third-quarter trading update (more on that later).
But the speed with which consumer expectations are changing also gives Comyn confidence his Uber driver’s worries about eight rate increases might not be borne out.
The CBA view is the four quarter-percentage-point rate rises – so 100 basis points rather than the 200 basis points many economists predict “will do their job to actually cool demand in the domestic economy”.
“Our view is that we won’t need as much tightening,” Comyn says.
There are a few factors playing into this view.
One is inflation, which Comyn argues is a lagging indicator and should start to come down over the second half of the year. Another is Australia’s high levels of household debt could also mean rate rises bite faster and harder than the market expects. In addition, the impact of the waves of fiscal stimulus seen in the pandemic years is also starting to fade.
But Comyn argues another key factor is the structure of Australia’s mortgage market, where variable loans are much more prominent than in other markets; this means most borrowers feel the impact of rate rises almost immediately.
Time will tell if Comyn and his economics team are right on the RBA’s rate cycle, or if the consensus view of economists wins out.
Nevertheless, Comyn believes consumers are well-placed to deal with 100 basis points of increases and business customers also remain in good shape; Comyn says businesses are broadly concerned about the health of the consumer, labor shortages and rising inputs costs, but they are still seeing good demand and are far less sensitive to rising rates than households.
He also points out that rising rates are giving long-suffering savers a bit of relief. When Comyn visited CBA’s Pacific Fair branch on the Gold Coast last Saturday morning, staff said they’d “yelled with delight” at the prospect of telling term deposit customers their rates were finally heading north.
While rising rates make life tougher for CBA’s customers, they help improve the bank’s margins, which fell further in the March quarter because of continued pressure from higher funding costs, the tilt towards lower-margin fixed loans seen over the past few years, and rampant competition.
“Clearly that starts to turn around when we go into a rate-hiking cycle, which certainly we are in, and we would expect that is going to provide a tailwind to net interest margins, into the first half particularly of our financial year 2023, Comyn says.
But there are a few variables to consider here, with the big one being competition.
And while the numbers for the March quarter don’t tell the investor a whole lot about what’s coming given how quickly the external environment is changing, they do contain some clues about how Comyn is approaching this next phase from a competition perspective.
At a headline level, the March-quarter result is essentially flat. Cash profit of $2.4 billion was flat on the average of the first two quarters of its financial year. Income was essentially flat – down 1 per cent to $12.2 billion, but up 1 per cent if you adjust for the number of days in this quarter. Expenses were – you guessed it – basically flat too, falling 2 per cent at a headline level, or 1 per cent when you excluded remediation costs (which continue to fall).
As has been the case for the last few years, CBA had to work very hard to stand still and even added full-time staff during the quarter, so it could “deliver additional volumes and execute on strategic priorities”.
But while volume growth was respectable – home lending increased at 8.5 per cent, for example (in line with the broader banking system) while business lending grew an impressive 12.6 per cent (or 1.5 times the broader system) – Comyn was prepared to gently lift his foot off the pedal as he balanced growth and profitability.
Competition in the mortgage market remains intense, as ANZ and Westpac try to claw back lost ground and smaller players fight for share. But Comyn says CBA is seeing loans written below the cost of capital, and it’s simply not willing to go there. “That’s obviously business we are happy to not be originating and not matching,” he says.
Similarly, CBA has pulled back from intense competition in the fixed rate market; it was first to move on lifting fixed loan rates late last year, and increased six times between October and February. This also weighed a bit on loan volumes, but Comyn is happy to give a bit of ground here too.
Comyn believes the level of competition in the market might ease in the coming months, which is perhaps not surprising given some players appear to be writing mortgages that are loss-making, or close to it.
This should allay the fears of some bank analysts that the boost to margins from rising rates will be competed away.