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Matt Comyn, the CEO of CBA, has revealed that the bank is holding a total of $6.4 billion for future credit losses off the back of the COVID-19 crisis.
Speaking to the House of Representatives standing committee on economics on Friday (4 September), the CEO of CBA was asked a range of questions from members relating to the impacts of the COVID-19 pandemic on lending and the economy.
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Mr Comyn, who was fronting the committee as part of the house’s regular review of Australia’s four major banks and other financial institutions, outlined that the bank reviews its loan loss provisions on a monthly basis, and its most recent calculations brought the total to $6.4 billion.
Indeed, when releasing the bank’s full-year results for FY20 last month, the CEO outlined that the bank had taken on an additional credit provision of $1.5 billion for the potential impacts of COVID-19 on its lending portfolios.
This takes into account the bank’s estimates that the pandemic (and its associated economic impacts) will cause, including repayment deferral arrangements.
As such, total provisions increased from $4.7 billion in FY19 to $6.4 billion in FY20 – equating to total provision coverage of 1.70 per cent.
Likewise, last month’s financial results also showed that loan impairment expenses rose from $1.3 billion in FY19 to $2.5 billion in FY20 – equating to approximately 33 bps of CBA’s loan book.
Speaking to the House of Representatives, Mr Comyn explained that the bank’s central economic forecast aligns with that of the Reserve Bank (which sees the economy contracting by 4 per cent in 2020, and expanding by 2 per cent in 2021, with unemployment reaching 9-10 per cent).
He commented: “The size of the economic contraction is less severe than we first anticipated, but we face a long and uneven recovery…
“We expect GDP contraction over the course of this calendar year to be just over 4 per cent – or 4.25 per cent. We think that during the course of next calendar year, GDP will increase by about 1.75 per cent. One of the key measures that of course we look at very closely is unemployment. We expect unemployment to be somewhere between 9 and 10 per cent in the December quarter (depending on the participation rate).
“As part of that, clearly I think one of the biggest challenges for Australia in 2021 and beyond will be how effectively we can move from the substantial (and, I think, very effective) income support that’s been in place to one of fiscal stimulus, generating aggregator demand and new jobs for the economy.”
When asked about stress testing, Mr Comyn revealed that the bank’s central scenario was for house prices to drop by between 10-12 per cent.
However, Mr Comyn added that the housing market has been “more robust” than it was previously. Acknowledging that regional areas are currently performing much better than metropolitan areas (with less downward pressure on houses versus apartments, particularly in the inner cities), Mr Comyn added that housing volumes in both August and July have been strong, with the housing market so far having “really only drifted downward slightly”.
“We have seen the Sydney market up [at] the 12 months to the end of July by 12 per cent. The Victoria market was up [in] 12 months to 31 July by about 9.5 per cent.
“So, a [national] fall somewhere in the order of 10-12 per cent, given where the housing market is and how strong it has performed in recent times, we would think is entirely manageable.”
When asked how many mortgagors the bank expected would default, Mr Comyn highlighted that the bank was in the midst of contacting customers who are approaching the end of the initial deferral periods, and “working hard to help our customers assess their options”.
“By the end of September we will have made calls to around 250,000 customers over a two-month period. Many of those we contact will be able to recommence their repayments. Some are facing more difficult circumstances.”
While the CEO said the bank expects to have a “better sense” of its loan impairments by the end of October, it would “expect and hope that the majority of customers will be able to commence their requirements”, but acknowledged that “clearly, not everyone will be able to do so”.
“[If that is the case,] then there’s a range of different options that we will work through on a case-by-case basis with our customers to establish the right solution for them.”
He added: “As a financial institution, both scenario planning and also an accounting standard perspective, we’re required to contemplate the future credit losses from the pandemic, which we did in our third quarter results, which saw us increase our loan loss provisions by one and a half billion dollars. So, we are holding a total of $6.4 billion for credit losses...
“[But,] of course, it is contingent upon the broader health outcomes, the economy, what else is happening in terms of containment or lockdown measures, the broader employment market etc, which we won’t have a particularly good sense of until probably early into 2021.”
[Related: CBA could keep Aussie, CEO reveals]
