Commonwealth Bank’s new home loans have barely returned to profitability following its latest increase to standard variable interest rates, chief executive Ian Narev says.
The bank on Monday lifted the rate by 10 basis points to 7.41 per cent, saying the rise reflected a “sustained increase” in both wholesale and deposit funding costs, a claim backed by the Reserve Bank of Australia (RBA).
Commonwealth Bank’s new loans were unprofitable before the increase and were now just breaking even, Mr Narev told ABC Television on Sunday.
“At the moment on the current cost of funds, new loans have just crossed the profitability line again but … 10 basis points doesn’t exactly make a huge difference,” he said. “The retail margin, which is the critical determinant of home loan profitability, in the last six months went down by nine basis points. That is a big drop.”
The bank felt it could not have increased standard variable interest rates by more than 10 basis points because it had to remain competitive, taking into account earlier increases by ANZ Banking Group and Westpac, he said.
Mr Narev also indicated that pressure from politicians was another factor the bank had considered.
Prime Minister Julia Gillard was last week scathing of ANZ – which was the first to lift variable home loan lending rates and then announced it would cut 1,000 jobs – because the RBA had left the official cash rate unchanged.
“There’s no doubt that the whole industry does get influenced by public debate, which focuses a lot on these prices,” Mr Narev said. “Some of the scrutiny we expect but I just want the discussion to be had on the facts.”
He also said the major banks were competing heavily for the deposit market amid a shift from lower-cost cash deposits to term deposits.
“What we’ve seen, understandably, in this economic climate is that a lot of business and personal customers have put more of their investment savings into deposits,” Mr Narev said.
“What you would expect them to do, as they have, is make sure they get the best rate possible. That also impacts on the cost of funds.”
