MAKING NEWS

Sun, 25 May 2008
Commbank: home loan rates will rise
HOME loan rates will be pushed even higher this year as a result of higher bank funding costs, Commonwealth Bank chief executive, Ralph Norris, warned yesterday.

Mr Norris said the credit crisis meant the bank was not meeting its increased funding costs.

This is despite Australia's largest home loan lender already having pushed up its variable home loan rate three times, to a total of 0.37 percentage points above the official cash rate.

The Commonwealth Bank also joined other big banks in scaling up its bad debt provisions, with analysts estimating a charge of about $800 million for the financial year.

The bad debt provisions are expected to rise by about 30 per cent from the first half to the second half, even though the first half includes Commonwealth Bank's bad debt charges for Centro.

Despite increases in its bad debt charges, they are smaller than those reported recently by its main rivals.

As a signal of continuing uncertainty, the bank yesterday dropped previous profit guidance that its earnings growth would be at or above the level of its peers, partly because StGeorge took a two-day hammering after cutting back its profit guidance.

Mr Norris also refused to rule out any Commonwealth Bank interest in St George, after Westpac's takeover offer. Commonwealth shares closed 14c down at $44.82.

In a third-quarter market update, Mr Norris said the bank's cost of funding for mortgages had risen by about 47 basis points as a result of the credit crisis.

He said the bank had passed on about 37 basis points in the extra costs, but there was still a shortfall of 10 basis points.

He gave a clear message to borrowers that interest rates would rise this year to cover the gap and improve the bank's profitability.

"I think the industry as a whole is facing a similar situation that funding costs day-by-day are continuing to increase; it's just a fact of the market," Mr Norris said.

"The fact of the matter is, over time, interest rates being charged will increase unless we see significant drops in rates both internationally and locally."

Mr Norris's message is particularly sobering because the Commonwealth Bank is among those least affected by the credit crisis, since its strong deposit base gives it a cheaper source of funding than its rivals.

This is reflected in the Commonwealth Bank having the lowest variable home loan rate of the majors, at 9.44 per cent.

The removal of profit guidance was seen by analysts as tacitly downgrading its profit forecast, although the bank's chief financial officer, David Craig, highlighted St George's sharp share price slump.

"The only bank that seems to have given any guidance at all was St George, and I spent the rest of the next day reading articles slamming them for being silly enough to give guidance in this economic climate," he said.

SOURCE: Stuart Washington, Sydney Morning Herald

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