Commonwealth CEO Sees ‘Uncertainties’ Capping Business Loans

Aug 13, 2014 10:07 pm ET

(Updates with shares in fifth paragraph.)

Aug. 14 (Bloomberg) -- Commonwealth Bank of Australia, the nation’s largest lender, anticipates concerns over U.S. monetary policy and China’s economy to curb a recovery in Australian business credit this year.

There aren’t yet sustained signs of a pick-up in non-mining investment to fuel an Australian economy that is transitioning away from a reliance on resources, CBA’s Chief Executive Officer Ian Narev said yesterday in an interview after the bank reported record full-year profit.

The Australian budget, China and the prospect of monetary tightening by the U.S. Federal Reserve are among the uncertainties making companies wary of investing, Narev said. While central-bank interest rates at a record low have helped spur housing, Australia’s business credit is still growing at about a sixth of its pace before the financial crisis.

“It’s difficult from where we sit to see the spark where business lending comes back particularly quickly,” Narev said from Sydney yesterday. Clients “can see opportunities for more productive investment but they are more cautious.”

CBA shares rose 0.4 percent to A$81.25 as of 12:06 p.m. in Sydney, taking gains for the year to 4.4 percent. The benchmark ASX/200 Index gained 0.6 percent.

Outstanding Australian mortgages grew 6.4 percent in the 12 months to June, the fastest pace in three years, compared with the 3.5 percent increase in business loans, Reserve Bank of Australia data show. The RBA cut on Aug. 8 its growth and inflation forecasts amid a drop in mining investment and reiterated interest rates will remain on hold.

Mortgage Demand

CBA reported yesterday cash profit for the year to June of A$8.7 billion, its fifth consecutive record. Second-half cash profit, which excludes one-time items, rose 10 percent from a year earlier as earnings from retail banking climbed.

While CBA is benefiting from higher mortgage demand in Australia, a lower tax rate boosted the result, which also revealed the first increase in charges for sour loans since 2012.

The bank expects Australian home-loan growth to continue in the year to June 2015 with possible interest-rate increases a risk to that demand, Narev said. CBA, which cut its five-year fixed-mortgage rate to a record low last month, boosted mortgage lending by 7 percent in its 2014 fiscal year, according to yesterday’s earnings statement.

While the bank is funding new loans with deposits, it increased bond sales in response to favorable credit markets, he said. CBA raised A$38 billion through bonds in the 12 months to June 30, compared with A$25 billion the previous year, according to a presentation yesterday.

Bond Issuance

Bank borrowing costs in Australia are near the lowest level in more than six years, according to indexes maintained by Bank of America Corp.’s Merrill Lynch. The average yield premium over the swap rate for bank bonds in Australia touched 90 basis points last month, the least since February 2008, the indexes show.

“We have pushed out pre-funding because funding positions have been good,” Narev said. “Against any historic benchmarks, it’s a pretty good point in the curve. We are not increasing strategically our reliance on wholesale funding markets.”