CBA: No bubble, no China slowdown, no worries!

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From AB+F:

In a conference call with journalists following the lender’s interim results, Narev put the hot potato issue of Australian house prices in the freezer by declaring: “we don’t think we have a housing bubble.”

“The reasons we don’t think we have a housing bubble is not just because a lot of the incidences of price rises are quite location specific, but also if you look at the fundamental dynamics of supply and demand, the current levels of prices are well supported by levels of supply and demand,” he said.

Regardless, he said the bank has conducted scenario testing exercises where Australian unemployment spikes to 11.5 per cent and house prices crash 33 per cent, emphasising that these are possible scenarios and not CBA’s actual projections.

“We never say never but we don’t believe we are seeing any of the even early signs of a housing bubble in the economy at the moment,” said Narev.

Financial System Inquiry

In response to a question about what issues the Financial System Inquiry should examine, Narev said the terms of reference are broad and appropriate, but highlighted a number of key areas for investigation.

“We haven’t had a good look at the financial system since the Wallis Inquiry and therefore it’s appropriate for the terms of reference to be broad, but I think clearly people are going to look at competition, we welcome that because we feel the environment is competitive and getting even more competitive,” he said.

The inquiry should also look at the funding model for Australia including bank funding and superannuation, and with the rapid change in technology, the issue of security.

“I think the inquiry must look at security and in particular the regulation of the shadow banking system to make sure that customers are being well served as more technology-driven customers are entering the market,” said Narev.

Colleague David Craig, the bank’s CFO, added whether Australian banks are holding too much capital relative to peers globally is another issue that needs to be examined.

“The more capital you have, the safer you are and so that’s a good thing and we applaud that but with safety comes a cost and so we just need to look, I think, at the cost of that,” said Craig.

“And we also need to realise that Australian banks are competing for scarce global funds and they need to be seen to be as strong as they possibly can be in order to get full access to funds at the best possible price internationally.”

Potential black swans

Narev identified a rapid downturn in China’s economy as the number one potential danger for the Australian economy.

“Now when people say Chinese growth is slowing from 7.8 per cent to 7 per cent, if you look at the absolute numbers that China is still growing at, even those levels [are] still very comfortable, so that’s not the signs we’re seeing at the moment,” he said.

“But if that was to rapidly change, that would be a risk for the economy, and continuing investor concerns which meant that capital stayed in local environments would clearly put a real significant difficulty on funding costs.

“Those would be the two major difficulties that we see, but again we are not seeing any of the signs of that at the moment.”

At least they’re looking in the right place! S&P saw the same yesterday, via Banking Day, the banks are:

“somewhat more exposed to funding and liquidity risks compared with some other highly-rated systems…the recent low-growth environment has been conducive to improving trends…the transition by Australian banks to improved deposit levels, longer-tenor wholesale funding, lesser reliance on short-term funding, expansion into new funding markets and investor pools (such as covered bonds), and pre-funding of wholesale commitments.”It said it might “derive further ratings comfort if these positive trends persist in more buoyant times.”

Hard to argue that, for the time being, the sun is shining upon CBA. We shall see as the economy heads into the shadow of the capex cliff.

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Comments

  1. How can they POSSIBLY say “Yes, actually, we’re in a bubble” ??

    Has ANY bank, reserve, government EVER said “Yes, actually, were in a bubble” ??

    They CANT say it, because the bubble begins to pop the very second they say it.

    Actually, the wholesale denial of any risks (bubble, china, EM’s, Europe, US, etc. etc) just highlights how unbelievably precarious the situation is.

      • It’s mainly spec. investor supply and demand.

        Like a poker tournament, we start with 200 tables and everyone has even chips, after some gambling and some time we come down to the last table and there are a handful of people with all the chips throwing them back and fourth at each other.

        New potential players are sitting out waiting for the next round when they can buy a chip stack at a reasonable price.

        Yes in RE the final players have renters throwing them money, but what if the ante keeps rising (interest rates) but the renters only throw in the same amount of money?

        How long will the ponzi keep afloat with over priced Chinese re-buys? The next round of players seem happy enough to sit out renting drinks to keep their seat.

      • Exactly Tucan

        The “fundamental demand” at the moment is coming from speculating investors searching for yield (clueless boomers) and foreign investors (crony capalists from China).

        The historically important base of the Australian housing bubble, are young first home buyers – who continue to be nowhere to be seen.

        This is classic Mynsky and Keen was right to point out how high bank profits such reflect the financial ponzi that is our economy:

        http://www.debtdeflation.com/blogs/2010/08/11/bank-profits-a-sign-of-economic-sickness-not-health/

        On a side note, I notice that the ACT land sales failed at auction.
        http://www.canberratimes.com.au/act-news/kingston-foreshore-land-blocks-fail-to-sell-at-auction-20140212-32io7.html

        This to me is very important, as it is the first sign in a long time that the land bubble in ACT is about to deflate.

        Broke State governments are in no position to totally choke supply due to their need for quick fast $$$…so expect to see supply price improvements – simply due to the fall off of actual demand to borrow and build.

        If ever there was a time to go short CBA, this is it. Long dated put options…Claw or Peter Fraser? Any takers?

      • “Land Development Agency chief executive David Dawes said it was good to see there was healthy bidding from developers”

        Stop talking rubbish Mr Dawes and just do your job.

      • Every bubble in history has burst, the longer it takes to happen the bigger the mess and fall out will be.

        If you think there isn’t a bubble you seriously need to stop smoking the funny stuff bud. =)

    • Not exactly but at least the UK is talking about the issues, the Reserve Bank of England expressed concerns because there was a possible housing bubble forming in London because the price of houses was 3.3 x average income…..

      http://www.telegraph.co.uk/finance/economics/10507120/Mark-Carney-Bank-of-England-will-act-to-stop-housing-market-growing-at-warp-speed.html

      Link to Ernst and Young

      http://www.bbc.co.uk/news/business-26006214

      Economics Professor

      http://www.bbc.co.uk/news/business-25318129

      http://www.bbc.co.uk/news/business-25318129

    • The Banks and the RBA are now stuck. Their balance sheet is massively overexposed to a single asset class – Australian property. Their record profits are the result of a bubble in that particular asset class, and another indicia that there is a bubble, since truly prudent banking is a low risk and low return operation.

      So long as their customers are willing to borrow more and more to keep that bubble expanding they are ok. But if that merry-go-round stops the next port of call will need to be a government bail out.
      The time for prudence has long since passed.
      On the other hand isn’t this all perfectly predictable and rational? Once one of the banks started chasing market share, the others had to follow or see themselves left behind. They opted for short term profit or long term consequences.

  2. “…where Australian unemployment spikes to 11.5 per cent and house prices crash 33 per cent, emphasising that these are possible scenarios and not CBA’s actual projections.”

    – Did a big-4 CEO just acknowledge that a 33 percent house price crash was a “possible scenario”?

  3. Of course they are saying there is no slowdown in China, they also want to jump on the mortgage bandwagon like ANZ and increase their loans to the Chinese and do not want to spook investors!

  4. interested partyMEMBER

    “we don’t think we have a housing bubble.”

    but we do think that we have a fantastic finely tuned method of extracting the lifeblood out of the real economy….before it gets wasted on something ” productive” You see, we don’t see ourselves as a “bank” but rather a “Corporate Tick” and we have hidden right out in the open with the help of you, the punter ….in debt to us. So ignore the calls that a bubble is growing……..what do they know about money. Trust us…..we know money…….we create the stuff. So off to work with you all…….hang on…..you are working, aren’t you???

    • Lol. Obviously he is referring to welfare and redistributional entitlements not various assistance to job and wealth creating enterprises.

      • Strange Economics

        Like the 700 billion subsidy to the banks. As well as govt guarantees and oligopoly protection – the 4 pillars…

        Or the 1.8 billion for FBT rort (with a nice car loan finance side benefit deal back to the banks) so the management can drive a luxury car…
        or…

    • Big bank CEOs are either fantasists par excellence or wilful liars. Surely they can’t really be as dopey and ignorant as their words suggest?

      Not helped by living in their privileged bubbles well apart from most of the rest of us.

      • Risks to shareholders of banks are an inconvenient truth for CEO’s. They are not paid to highlight risks. The only CEO who talks about risks, past strategic mistakes, lax credit policies etc is the new one appointed after a crisis has broken and it is obvious to all and sundry.

        If credit was centralised, then decentralise it as clearly the Head office credit anlaysts weren’t close enough to the customer business to really understand it. If credit wa decentraliased, then centralise it as obviously the branch credit offices were not independent enough from the influence of their customers and had become too keen to promote the customer rather than to protect the bank’s interests.

      • Slambo
        Most university academics seem to be that dopey and ignorant so why not Bank CEO’s?
        Yep! Bank exec salaries are just a disgrace!

  5. ANZ agrees, as does a conga line of suckholes….sorry, experts.

    http://www.couriermail.com.au/realestate/news/anz-tips-sharp-housing-price-rise-before-the-end-of-next-year/story-fnihpu6h-1226825139772

    ANZ chief economist Warren Hogan told the Committee of Economic Development of Australia that the “housing market is at the early stages of a solid cyclical upswing” fed by low interest rates and market shortfalls.

    “We expect a 15-20 per cent lift in home prices between 2013 and 2015,” he said with long-awaited rises already underway in Sydney and Melbourne.

    But experts agreed Australia was not in a house price bubble yet.

    Commonwealth Bank head Ian Narev said: “We never say never — but we don’t think we are seeing even the early signs of a bubble at the moment.’’

    Queensland Treasurer Tim Nicholls said there was no evidence of a housing bubble in the state.

    “In Queensland we’re seeing steady but moderate growth in house prices, so we’re not overly concerned about a bubble here,” he said. “We think that Queensland growth rate is about right. We’d like to see some more growth coming through in terms of the number of houses and approvals coming through, but in terms of prices, we’re not seeing a bubble coming through here.”

    Mr Hogan agreed it was not a bubble “but it could be”.