Bloomberg News

Commonwealth Bank’s New Loans Are Profitable, CEO Narev Says

February 20, 2012

Feb. 20 (Bloomberg) -- Commonwealth Bank of Australia, the nation’s biggest by market value, said new loans are profitable after boosting its mortgage lending rate by 10 basis points last week, a move independent of the central bank.

“On the current cost of funds, new loans have just crossed the profitability line,” Chief Executive Officer Ian Narev told Australian Broadcasting Corp. television yesterday. “Ten basis points don’t exactly make a huge difference.”

Narev, who took over from Ralph Norris in December, is among Australian bank chiefs battling rising wholesale funding costs and the weakest demand for home loans since 1977. Commonwealth Bank and the nation’s other three biggest lenders have faced intensifying pressure from Treasurer Wayne Swan to go in step with the central bank’s rates policy.

“There’s no doubt the whole industry does get influenced by public debate which focuses on these prices,” Narev said. “The whole relationship between a bank and its customer base should not be defined by one pricing point and one product. The debate must be had on the facts.”

Reserve Bank of Australia Governor Glenn Stevens trimmed the nation’s benchmark interest rate by a quarter percentage point to 4.5 percent on Nov. 1 and to 4.25 percent Dec. 6 to help revive household demand and hiring. The central bank on Feb. 8 defied the forecasts of 24 of 27 economists for another cut, after which the four big lenders increased rates.

Raising Rates

Commonwealth Bank increased the interest on a variable rate home loan by 10 basis points to 7.41 percent on Feb. 13, followed by National Australia Bank Ltd., which added 9 basis points to 7.31 percent. Westpac Banking Corp. boosted the cost by 10 basis points to 7.46 percent on Feb. 10, after Australia & New Zealand Banking Corp. added 6 basis points to 7.36 percent.

While Australia’s biggest banks have cut their reliance on credit markets as local households save at close to the highest rate in a quarter century, debt markets still furnish about 40 percent of the funds they use for lending.

Commonwealth Bank’s net interest margin, a measure of the profitability of the bank’s lending business, narrowed 10 basis points to 2.15 percent in the half year from 2.25 percent in the six months through June 30, the bank said Feb. 19, when it announced first-half profit rose 19 percent to A$3.62 billion ($3.88 billion).

“Costs of funds move over time,” Narev said in the interview. “What we don’t want to do is react in a kneejerk way every time things change because our customers want some sense of stability. The primary thing we look at obviously is the action of our competitors.”

--Editor: Paul Tighe, Jim McDonald

To contact the reporter on this story: Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editors responsible for this story: Paul Tighe at ptighe@bloomberg.net


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