Commonwealth’s bonanza derived from taxpayers — not so much excellent management

The Commonwealth Bank grabbed the headlines yesterday reporting a profit of more than $8.65 billion, a $6 billion buyback, and a $2 a share final dividend — making a total for the year of $3.50. CEO Matt Comyn attributed the result to “continuing strength of our businesses, combined with a focus on customer needs, digital engagement and consistent operational excellence”.

And so impressed was the board with Comyn’s “excellence” that they upped his pay for the year to $5.2 million from $3.9 million in 2019-20 when his bonus was cut as a means of helping send a pandemic message.

But as always in banking, the real story is in the details in the accounts — one that isn’t exactly the line spun by Comyn, and lapped up by the media.

The CBA, like the rest of the banking and finance sector, owes much of its success over the last 12 months to the colossal JobKeeper package and additional JobSeeker payments, which not merely supported households but kept workers linked to employers, enabling a much faster recovery than from a normal recession. That kept bad debt provisions and problem loans low for banks, including the CBA.

Also helping was the decision to allow people to access their superannuation — around $36 billion was withdrawn, which flowed to the banks, retailers, landlords and others.

And the government’s very successful HomeBuilder package kept the construction sector going, which otherwise might have crashed and inflicted serious damage on the financial sector as developers and construction firms went under, along with hundreds of thousands of jobs.

But the key support came from the Reserve Bank and involved a bank’s key product — money. And cheap money: $188 billion of it.

The simple rule of banking is borrow low and lend high. The cheaper the rate a bank can borrow, the higher the profit. And doing that is much, much easier if you can borrow very cheaply. The RBA established the Term Funding Facility (TFF) under which a total of $188 billion was lent to major and minor banks in the year to June 30 at a rate of 0.10% for three years.

In its third Statement of Monetary Policy for the year last Friday, the RBA identified the top 10 users of the TFF. Which bank topped the list? The CBA borrowed $51.14 billion, all of its allowance set by the RBA. The cost to the CBA of borrowing that $51.14 billion under the TFF will be around $1.53 billion in interest payments.

The CBA lent a total of $42 billion in 2020-21 — $31 billion for home mortgages and $11 billion for business. That leaves $9.14 billion of the TFF money in the CBA’s accounts to be used this current year (which will probably account for between 22% and 24% of total lending). The bank didn’t have to dip into existing deposits from customers — which surged by $60 billion in the year as well.

What did the CBA get for its lending? Its interest rates ranged from just under 2% (at one stage) for term home loans, to 5-10% a year for businesses and up to 19% or more for credit cards. CBA says its net interest margin was 2.03% (down 0.04 from a year ago). That includes existing loans, many of which carry much higher interest rates.

The TFF also ensured CBA had a strong credit profile: it says it had a net stable funding ratio of 129% (100% is the minimum). “The increase in the ratio was due to the growth in customer deposits, the benefit of the TFF and our strong capital position,” the bank explained. In other words, the cheap money from the TFF and the unlent amount counted as cash on hand in deposits.

The RBA’s commitment to both financial stability and easy credit drew, initially, first home buyers, and then investors, into the housing market, sparking a surge in the residential mortgage lending market that is lower-risk and easy returns for banks.

The TFF isn’t paying for the CBA’s buyback, though — the bank has been selling off assets since a series of outrageous scandals forced it out of wealth management. Some of the assets sold include life and general insurance, funds management and financial advice businesses, which generated more than $6 billion.

A more accurate results media release from the CBA would have said that “like much of the rest of Australia we’ve been kept going by a combination of fiscal and monetary policy, with the TFF from the Reserve Bank helping us make a big profit”. If only the rest of us could enjoy a pay rise like Matt Comyn’s simply for cashing in on supportive government policy.