Commonwealth Bank CEO Ian Narev in Sydney, February 2014. Photo: Bloomberg
Commonwealth Bank chief executive Ian Narev has hosed down warnings that Australia's housing market is a systemic risk to the economy, and predicted banks would continue to aggressively target the $1.3 trillion mortgage market.
After delivering a record-breaking $8.68 billion full-year profit, Mr Narev on Wednesday played down a key claim of the government's financial system inquiry – that banks may be too mortgage-heavy.
An interim report from the inquiry, chaired by former CBA boss David Murray, last month said housing was a "systemic risk" after a rapid increase in household indebtedness since the mid 1990s.
Mr Narev, who leads a bank for which mortgages make up 54 per cent of assets, argued this missed the point.
He also predicted the fight between banks to win more mortgage customers was set to intensify because of the big profits on offer in home lending.
Focusing solely on housing lending as a source of risk did not make sense because in previous recessions business lending had been the first source of bad loans, he argued. Housing defaults tended to come later when unemployment rose.
"History will tell you that if you look back at the early 1990s, the first thing that goes is institutional credit quality, that takes a bath, and then small and medium enterprise credit takes a bath, and then after that housing takes a bath," he said.
“The question I think we’ve all got to think about ... is a lot less, is it home lending versus business lending? It’s really about the overall level of macroeconomic risk in Australia generally."
Mr Narev also dismissed fears of a housing bubble, emphasising the big differences between Australia's market and those overseas.
CBA also announced a $2.18 interim dividend, which will be fully franked and paid on October 2.
Mortgages played a critical role in driving CBA's profits in the year to June, with its flagship retail banking business posting a 12 per cent annual rise in profits, helped by its dominant position in home lending. CBA writes one in every four mortgages, and it held this market share steady throughout the year.
The bank also benefited from low numbers of customers defaulting, with the cost of soured loans as a share of total assets falling to 0.14 per cent in the year.
In a trend that it benefiting borrowers, banks are competing fiercely to win new mortgage customers by offering competitive interest rates, and Mr Narev predicted this would continue.
Last month CBA unleashed a wave of moves by other banks when it cut five-year fixed rates to a record low, and Mr Narev said the bout of mortgage competition had further to run.
Even if the Reserve Bank did not move interest rates, he stressed this was only one influence on banks' mortgage pricing decisions.
“We’ve always said that the Reserve Bank rate is one input into the cost of funds, which are one factor into the pricing," he said.
"You’re going to see more of that link being challenged, with different products happening, fixed versus floating, different specials here and there."
Despite this competition, CBA’s net interest margin – the cost of funds versus what the bank charges for loans – remained unchanged during the year at 2.14 per cent.
Mr Murray has said that one way to contain the "systemic risk" of housing loans is for banks to hold larger loss-absorbing capital buffers, triggering investor concerns this could dampen dividend growth.
But CBA generated more capital than analysts had expected, with top-tier capital as a share of assets up 110 basis points to 9.3 per cent of assets.
Watermark Funds Management investment analyst Omkar Joshi said the capital ratio was the standout feature of the result.
“Overall [it is] an in-line result but with generally pleasing quality," he said. "Capital was the highlight."