Rate cuts won’t stimulate housing market whether passed on in full or not: CBA chief executive Ian Narev
Commonwealth Bank chief executive Ian Narev has defended the bank’s decision not to pass on full rate cuts to borrowers, who he says are using lower mortgage rates to pay off their mortgages faster rather than take on more debt.
As a consequence, the bank does not expect interest rate cuts to stimulate a recovery in the housing market in the short term.
The Commonwealth Bank passed on 20 out of 25 basis points of the October RBA cash rate cut and has passed on 131 out of 150 basis points cut from the cash rate since November last year. The average for the major banks is 116 basis points.
Speaking at the bank’s AGM yesterday and on the back of full year profits in excess of $7 billion, Narev said it did not make a difference if the bank passed on 25 basis points, 20 or 18, as the reductions were being used to “accelerate repayment of debt”.
Also speaking at the AGM, Commonwealth Bank chairman David Turner said rate cuts should not be expected to stimulate the housing market in the near term.
"The rule of thumb is in an economy that's buoyant, an interest rate cut doesn't feed through to house-buying activity for about 18 months," he said.
In its annual report, the Commonwealth Bank describes the 2012 financial year as “another challenging one for financial institutions in general, and for the Group in particular”.
“The macroeconomic environment has again been dominated by uncertainty and volatility in global financial markets.
“While the fundamentals of the Australian economy appear sound, a lack of corporate and consumer confidence has dampened demand for credit and seen our customers move to strengthen their balance sheet as they remain cautious about the immediate outlook," says the annual report.
However Narev said the bank not passing on rate cuts in full has not been a factor in the current consumer caution and unwillingness to take on more debt.
He says he expects demand for credit to remain subdued in the current financial year with higher savings rates and more nervousness regarding investments.
Overall, Narev said the Commonwealth Bank was pleased with the performance of the group “by our financial performance and our performance for our customers and our dividend stream for shareholders.”
“Particularly in the environment we are operating in at the moment, confidence for a financial institution is critical," he said.
Narev said while short-term performance was important, customers and shareholders relied on the bank to prosper for the long term.
He said the bank remaining customer-focused was key to building long-term value
In this regard, Narev pointed to the September Roy Morgan survey, which has customer satisfaction with the Commonwealth Bank at the highest it has been for the history of the survey.
The annual report notes that customer deposits make up 62% of total funding and says that funding costs were “elevated” in the past financial year.
“Customer deposits increased to $379 billion as at 30 June 2012, up $30 billion over the prior year. Customer deposits represented 62% of the Group’s total funding source at 30 June 2012, up from 61% in the prior year,” says the annual report.