Marvel at CBA bubble profits…from public losses

A terrific article yesterday from Crikey’s Bernard Keane and Glenn Dyer:

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Also helping was the decision to allow people to access their superannuation — around $36 billion was withdrawn, which flowed to the banks, retailers, landlords and others.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

QED. CBA is simply transforming public debt into private profits at no extra charge. What have we all got out of this? No equity for taxpayers while shareholders enjoying a bubble valuation the scale of which Australian banking has never seen before (nor have many other markets quite frankly):

While homeowners get to pretend that high house prices are a terrific, entirely fair, and sustainable form of wealth. And we are all ever-more leveraged to the same gigiantic incubus lest it takes down the entire economy amid a full-blown Delta recession.

At least a few investment banks are starting to see the limits of said parasite. Both Citi and CS downgraded it to sell yesterday. The former said:

Looking forward, in FY22, despite about 6% volume growth, we now only see revenue growth of about 1%.

Underlying core earnings are now declining by about 0.5% with cost growth remaining stubborn.

With excess capital quantifiable and priced in, CBA’s 2.4x book multiple appears at odds with the emergence of a more sluggish underlying earnings outlook.

Only until it is granted MOAR free, and soon to be negatively-priced, money!

Houses and Holes
Latest posts by Houses and Holes (see all)


    • PalimpsestMEMBER

      or perhaps an uncommon wealth, privatised away from the grubby hands of the commoners.

      • Think we could see $120 to $130 share price in this bubble but CBA won’t exist next year in its current structure, probably some government entity – guess it’s already transitioning to where it’s going.
        Think Gov may own a large % of our banking sector next year
        You guys can work out what they will come up with
        Anyway I think CBA will be the short of the decade if we see $130 around

        • Hi, why are you thinking that the Gov will own a %? I think central banks have become a lot more sophisticated since the GFC and have had 18 months (appropriate as it takes us to Q4) to plan for the next phase. Which Govt is going to step in? They didn’t last year even as you rightly said the banks would have been going down and out.

          • Rippy
            Yes you are probably correct
            It’s not even discussed really the banks were bailed out but Phil Lowe actually said, they provided more support to the banks 2020 than they did on 08
            RBA will probably do the same thing
            Won’t stop share price falling but yes I have no idea
            I believe in the end it will have to be nationalised but RBA will definitely stabilise it, banking sector probably largely government owned
            What’s the difference, we are already heading to socialism
            Job keeper distaster payment, government jobs government assistance

            We are already deeply in the process of Australia moving to a very socialist society

            It’ll really move forward into next year

            Much more government control of us over everything

            We aren’t going back to what we had, that’s finished

            RBA will guarantee everything initially

            The problem is inflation is getting worse (even though I know”transitory” is the popular” word

            Still think they’ll close the banks, RBA will come in & the 3 stooges will have to come up with some plan

            Rippy are they planning for the next phase ? They may have some plan but it won’t be big enough to support what’s ahead

          • I dont know what they’re precisely planning but I’m fairly certain it’ll look like negative rates and ongoing banking support. That’s the path of least resistance especially when you have governments unwilling to challenge the role of the banks (RC done and dusted). But it works for them, they also own lots of property and no doubt have people advising them of civil unrest if an attempt to reduce the debt in any meaningful way was attempted. More extend and pretend.

            Yeah I reckon you’re right, we aren’t going back to what we had which reminds me, have you seen the recent palisades gold interview with Marc Faber? Gloomy as but he seems to tell it like it is.

          • Haven’t seen Marc but I like gold here. We’ve had a good sell off & think we’ve probably seen the lows
            Bounced off 1675 twice convincingly
            Think USD should come off, helping commodities run higher again

            Not sure what they’ll do with the banks, but I’m sure they’ll come up with something but it’ll be from the ashes
            Nothing is going to stop this crisis

        • Ailart SuaMEMBER

          “We are already deeply in the process of Australia moving to a very socialist society”

          I doubt that, but a step or so in the direction of where the Nordic nations are at, would see us in a far better place than in our current ‘Laissez-faire’ cesspit! A look at all the UN World Happiness Reports provides a fair indication of how happy citizens are living under an economic model based on capitalist economics with robust socialist values. And you can forget about the ALP steering us in that direction.

  1. Ronin8317MEMBER

    Australians wants higher house prices, and we got higher house prices. CBA is doing God’s work.

  2. Fishing72MEMBER

    It’s just the market acting according to the unseen hand as pure capitalism was intended. Nothing to see here. Move along.

  3. Arthur Schopenhauer

    The NSW second wave looks to be on a tear. It will drag most of the Eastern Seaboard consumer economy to a rapid slowdown.

    Will it stop the Ponzi? Or will everything possible be done to sustain the unsustainable? Probably the latter.


    • It’s sustainable enough. MOAR and MOAR free money, lower (negative) interest rates….just for starters.

    • Probably the latter
      O, ye of little faith!
      what sort of guarantee do you need before you align your beliefs with those of the commonmanwealth

  4. RanganutsMEMBER

    Everyone is right here, but as a shareholder I am enjoying the ride. I’m not going to sell as I’m not big on selling assets that turn over steady stream of dividends either, (I know some traders will make hurting sounds when they hear that). Time in the market beats timing the market eh?

    I am considering doing the share buy back for my Dad’s super fund though. He’s in full pension mode so there seems to be a good argument once the numbers get crunched… I think.

  5. Crikey’s math is way wrong.

    “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.”

    If Bernard could use a calculator he’d discover $51.14b from the TFF at 0.1% over 3 years = $153,420,000 in interest.

    Yet over the life of those mortgages at say 3% they’ll earn what, $50b?

    The CBA and the rest of the banks are nothing but bandits

    • a 1% interest rate is expressed as 0.01% and a 0.1% interest rate is expressed as 0.001.

      Crikey’s calculation is out by two orders of magnitude!!

      $51.1B x 0.001 x 3 (years) = $153.42M

      Yet over the life of those mortgages at say 3% CBA will earn 30 times that interest cost.

      Nice work for bandits stealing with impunity