More facts needed in profit debate: CBA

15 Feb 2012, 8:08 pm   -   Source: AAP
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CBA said it was writing mortgages at a loss before hiking interest rates and called for the debate over banks' profits to be grounded in facts.

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Commonwealth Bank of Australia (CBA) has hit out at the public debate over bank profits and interest rates, with boss Ian Narev calling for a more informed discussion grounded in the facts.

The call came as he confirmed that before CBA lifted its variable interest rate on home loans on Monday, it was writing mortgages at a loss.

RICARDO's BUSINESS: CBA's record profit

Stressing he was not speaking out of frustration, Mr Narev told reporters it was vital that politicians and commentators understand the specific measures and drivers of profitability, funding costs and interest rates set by banks.

"I expect and welcome scrutiny," he said after CBA unveiled a 19 per cent rise in net profit to $3.624 billion for the six months to December 31.

"What's critical in our mind is that that scrutiny is had on the facts and not against abstract concepts."

CBA is trying to balance the needs of a range of stakeholders including its 10 million customers, 800,000 direct shareholders and 52,000 employees, he said.

"I think that on some of the sides, in particular the shareholders and deposit-holders, their voices have been lost a bit in the debate."

The CBA boss was responding to claims that Australia's banks are the world's most profitable.

FitchRating's has claim that when compared with global banks, local banks enjoy strong profitability for home loans because they have relatively few non-bank competitors.

CBA's net interest margin (NIM) for its Australian operation dropped 10 basis points to 2.21 per cent during the first half of 2011/12.

Its NIM for retail banking operations, largely driven by mortgages, fell by nine basis points compared to the second half of 2010/11.

Before CBA hiked its standard variable home loan rate by 10 basis points to 7.41 per cent, it was writing mortgages at a loss in the broker and proprietary channels, Mr Narev said.

"At the rate home loans were at prior to the move we had on Monday writing a new home loan was not profitable," he said.

Australian banks' average return on equity (ROE), a key measure of profitability, is running at just over 15 per cent, in line with Canadian banks, whereas those of banks in Indonesia, China, India and Russia are higher, he said.

CBA's interim ROE on a cash basis was 19.2 per cent, unchanged on a year earlier.

Banks funding costs have continued to rise since the global financial crisis, with the cost of deposits and wholesale funding becoming significantly more expensive.

"As global funding costs have gone up on the wholesale side, (attracting) deposits have become more important to banks and they've competed harder for them and therefore, deposits as a cost of funding have also become more expensive," Mr Narev said.

CBA absorbed 15 basis points of funding costs since June 2007 instead of passing this on to borrowers, chief financial officer David Craig said.

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