What the CBA results tell us about the economy

ABC Listen, podcasts, radio, news, music, and more. Find a pick one word to describe America's history in the Middle East. And probably go with mistake. But it was the Americans believe all a dreadful mistake. Obviously, the war in Iraq is a big fat mistake. Most Americans actually think this war is a mistake. I'm Matt Bevan and on my show if you're listening, we actually try to learn from the world's mistakes. Learning from history. I mean, who could imagine? New episodes every Tuesday and Thursday on ABC Listen, or wherever you get your podcasts. Commonwealth bank earnings are in and in the billions and increase from last year's results that exceeds expectations for the banking behemoth. But what to make of the dip in mortgage applications that CBA and other banks are reporting? And how are the banks and the RBA looking at persistently weak productivity in Australia's economy? Welcome to ABC Business Daily. I'm Steph Charmets. And I'm ABC Business correspondent David Taylor. Thanks for joining me, DT. You've just come fresh off that investor and less briefing from CBA. What's the vibe around this result? Because the numbers as are expected are pretty huge, you know, closing in on $11 billion annual profit, on all metrics, you know, the cash profit and the statutory net profit. Yeah, what was the vibe? What was the vibe? Look, I have to say that we're coming at this from the fact that the Commonwealth Bank is huge. It started off way back in the day nationally owned and then when it was converted into a private bank, it's just grown and grown and grown over the space of decades. And, you know, the marketing has been obviously very successful because, you know, the majority of Australians who are attached to lending in some way, whether it be through a car loan or a business to a less degree, but it's mainly for the millions and millions of homeowners that have a mortgage. The majority of them are with the Commonwealth Bank. Westpac is next. The NAB tends to focus on businesses, and the ANZ is the fourth cab off the rank. So analysts are expecting a very, very solid result, and they basically got it. The key for this result is the fact that volume growth in mortgages has basically been pretty good because they have most homeowners when they think of alone, they think of the Commonwealth Bank. What was interesting about the result is that they flagged that mortgage applications just since May, really since the May budget have fallen, I mean, dramatically too. 15% fall over that period of time is a lot. And there are two reasons for this, and the Reserve Bank Governor, Michelle Bullock, flagged this yesterday as well. Pretty simple. You've had three interest rate hikes, and they were consecutive rate hikes, and they took the wind out of the market sales in terms of home loan applications. So that obviously means when you got rate hikes, it flows through to mortgage rates. It's harder to borrow, right? It's pretty simple. But also the government flagged tax changes in the May budget, which eventually passed the Senate and became law. But what you've got is changes to negative gearing and changes to capital gains tax. So combine all that, and yes, you've got an under-supply of housing, but it's dented confidence in the market, and it's also meant people aren't quite sure about where they want to go ahead with a home loan application. So that's what the bank is saying. Hey, we did really, really well. Massive $10 million, $10 billion plus profit. We're going really well with a king in the market. Everything's great. Oh, by the way, budget not so great for us, nor the rate hikes. So we're watching that. But also the economy is not doing so well either. For the same reasons. You've got rate hikes, and you've got inflation bearing down on households. So they're a little bit worried about the future, but Steph really importantly, the market doesn't seem to be worried about that, those particular comments, because basically the shares can't speak for the rest of today. You can't speak for the rest of the week, but the share price movement was pretty okay. Yeah, you were saying a pretty modest fall this morning, and the market itself was down more than that. So it seems like a bit of a nothing to see here, as I think you referred to it. And I know you and I sometimes like to nerd out a bit about the details in these results. My favorite ASX release has to be the investor chart pack. There's so many nuggets in there that you can get into. And this is where I think CBA emerges as having access to so much data of Australians. I think they've got more than 15 million customers. Even if they're not your main bank, a lot of people will have a CBA account for something. And I think they've said one in three Australians say CBA is their main financial institution. So that's a huge amount of data they have access to. And they crunch a lot of that in these results and package it up nicely for us in some cool charts. So I wanted to get your view on some of these because I think it tells a story that we have kind of been talking about and reporting on over the past couple of years. One of it is this kind of generational divide in terms of wealth having paid off your home loan. A lot of it is common sense, the older you are, the more likely you are to have paid off your home loan. Obviously we've had this huge property boom, which means we've got a great concentration of wealth among older Australians. And CBA has broken this down. They've called it retail balances by age. And they've split it up in terms of mortgages. I give the game away, doesn't it? Retail balances by age. Which metric are we concerned about here? So if you have a look, we've got mortgages, make up 35% of mortgages are held by 35 to 44 year olds. That's so interesting, isn't it? Yeah, and where's deposits? It's 46% belongs to 65 plus year olds. Well, that's even more interesting. Wow. Yeah, so as we were discussing, this obviously has quite broad ramifications for the economy, for the transmission of things like monetary policy. Can you explain what impact this has on institutions like the RBA trying to affect the economy and spending and things like that? Which just tells me, if you're between the ages of 35 and 50 and you're stressed out because you don't have money, you don't have money, join the club. Yeah, that really speaks to what you read on in the paper in social media, the videos you watch on social media, the stuff you see on the six o'clock news, more importantly, the seven o'clock news on ABC TV. It just speaks to it because you've got this cohort of Australians who some have been fortunate enough to have money handed down from above. Others have really worked hard to save up for a deposit and more and more stuff as you know, aren't able to do that anymore because properties are just too expensive. But you've got this cohort, sort of roughly speaking, 33, 34, 35, right up until the sort of tail end of middle age, 50, who are going, what do we mean to do? The boss isn't giving me a pay rise. You know, the cost of, I don't know, why I always pick this product. I just do, don't judge me on it. But you know, raises, you know, shaving raises, keep going up. You know, all those little tabolds you put in the dishwasher if you're fortunate enough to have a dishwasher. You know, 50 bucks a pop sometimes. And it's just hard. And then you've got this mortgage payment that comes through. You know, some people have a $750,000 line. Sometimes it goes up to a million dollars and you've got to fork out eight grand. A month, like it's nuts. It's absolutely nuts. So when you add car insurance, when you add out of pocket health care costs, you know, the cost of building a new home and everything that goes with home ownership in terms of electricity costs and energy bills. You know, and then you add all the discretionary items. You know, heaven forbid you go out for a restaurant dinner once a month. You don't have any money left over. So the Commonwealth Bank is showing this in a clear chart that the people in that mortgage belt don't have money. They don't have money left over to save. Whereas those who are paid out their home outright, and you know, best of luck to them, they're hardworking Australians. We should say not all people over the age of 65 own their home outright. They're a plenty of people who are still doing it tough. But for the cohort of people over 65 who are paid out their home have a very nice superannuation balance. They're doing the spending. So I'm sure Michelle Bullock at the Reserve Bank in the Sydney CBDs thinking themselves, well, you know, we've only got one tool. So we are hitting that mortgage belt hard again, you know, that they've hit mortgage borrowers three times this year. And I suspect the hesitancy of going again, despite the fact that inflation is still in her words too high, is that start-up like this shows that it's really not mortgage borrowers that are doing the damage. Yeah, I think as you alluded to there, this is of course not to say that every person in those age brackets fits that bill. And this data is about the overall balance of deposits and loans. So it's the balances held in that age group. We don't know how many people that split across all they haven't disclosed that. They've also got another interesting chart, which I think goes to what you were talking about, about household spending. They've looked at the five year change to 2026. And spending among CBA non-home loan customers is up 24% over that period. Most of that is accounted by inflation. So prices rising. So they've increased their spending just a little bit more than prices have risen. Whereas if you look at the other group they've looked at, which is people, the average CBA home loan customer, so they've used a $600,000 or more home loan. They've been paying $600,000 more. increase their spending 15%, which is below inflation. So I think that shows that that cohort is obviously having to cut back. So they're making real cuts because stuff costs more. So they're getting less stuff, less services. But that cohort that isn't as directly affected by interest rates hasn't cut back their spending as much. No, 100%. And where you get really interesting data, and it's interesting data, but it's sometimes it's heartbreaking is that there are a number of items in the basket that are sort of in a gray area between discretionary spending and non-discretionary spending. One of them is car insurance. So if you go to somewhere like the National Dead Helpline, they will say to you, people have stopped paying car insurance because they think they view it as discretionary. It's not discretionary. It's very much something that you need to pay to protect yourself against an accident, which could wipe anything from $5,000 to $100,000 off your savings. But we are now in that time, especially for that cohort of people that are finding it impossible to save and are perhaps dipping into their, as you mentioned, cutting back on spending. You do get situations where people start cutting back on stuff, they really shouldn't start cutting back on. And that's where it starts to go from being stressful, mortgage stress to mortgage distress. And mortgage distress, I suppose, when you call it a bank, it's like, I just can't do it. And that's where we bring in this idea of unemployment because yesterday, the Reserve Bank Press Conference, it's pretty clear. And economists say this too, that everything is okay. We're not in dire straits yet. The economy is slowing. More applications are coming down. It's clear that things are not brilliant, but they're not terrible. What the Reserve Bank is worried about is increasing interest rates too much. And if they do that, obviously, you'd see the Commonwealth Banks profit materially coming down, but you'd also see a homeland of rears going up. And that was the key point in today's presentation from the Commonwealth Banks Mac Common, that a rears are really, really low, really low. And they really haven't budged. And that's because the jobs market, according to the Commonwealth Bank, is quite robust. And if you've got a job, anyone knows, anyone knows with a mortgage. If you've got a job, things are basically okay. You lose your job, you fall for cliff. The financial cliff, that is. And it seems to be that Australians and many others, I'm sure, in other countries, will always pay the homeland first. You'll start to see other signals in the market like a rears on telco bills or utility bills, because people will put their money till they absolutely cannot into their home loan repayments. So it's often a bit of a lagging indicator, I think, in terms of other things you could look at. Was there anything else that stood out on the call from Mac Common? Obviously, it's quite a barometer for the Australian economy, the CBA, aside from housing market worries about home lending, softening. Is there anything else CBA said that was interesting on the economic outlook? Look, my guess is that analysts were reasonably happy with everything the Commonwealth Bank had to say. And they do benefit from having such a large market presence. I would just say that it was interesting that they've in the results announcement, they've got mortgage credit growth at 4% to 6% of the year ahead. And when Mac Common was pushed on that, he said, look at the margin, it might reduce or tighten to say 4% to 5%. And you're thinking, "Oh, that's just a 4% to your point difference." But people did jump on it. So I would say that the key thing that we learned from, or the key two things we learned from Michelle Bull, yesterday, the Reserve Bank press conference was that the Reserve Bank is worried about productivity, and the Reserve Bank is worried about the war in Iran pushing the straight-of-form most remaining relative of a shut, that pushing up oil prices and that filtering through to parts of the economy that really can't take much more cost pressures. We saw that from the Nav Business Survey yesterday, cost pressures remain, despite a full demand from businesses coming down, the cost pressures remain. So it's just a really weird scenario where we're facing this idea that the economy can't really grow much more than it is without generating inflation. That inflation remains. That will continue to slow the economy. And CBA is saying, look, we're hoping for 4% to 6% credit growth, mortgage credit growth, but it might come down to 4% to 5%. My guess is that if the war in Iran continues and productivity remains really, really weak, you are going to see more of the same of what we was flagged in the Commonwealth Bank's results today that home land applications will continue to fall, and you'll see a lack of credit growth. That just fades back through to the economy. So there is a loop. There's a bit of a dome loop there that we have to watch for. At the moment, things are okay, but it's something to watch for. So you win the room yesterday as well. It seems like you're just on conference calls and at press conferences all over the place. You are the business correspondent. What were the main questions put to Michelle Bullock? What were you hearing from her? Because I sort of interpreted it as she seemed quite a lot more hawker, so I thought than the statement, but perhaps that was by design. Yeah, I mean, I think everyone's thinking the same thing. I was thinking, which is, what about this? What about that? What about this? What about that? Housing was obviously an issue. Is the tail wagging the dog or is the other way around? You worried about house prices falling? Is that make it easier for you? Does that make it harder for you? Are you connected to house prices anyway? What about the budget? Are you still worried about that? What about the fact that inflation is still too high? And yet, you keep saying that there's a threat of higher rates and yet you don't follow through. And then she always responds, was, "Well, we did three rate hikes earlier in the year. Consecutive rate hikes, that's still working its way through the economy, all this sort of stuff." And the ever-present idea that there are people out there that are really suffering. Do you know that Michelle Book? Do you understand that? Are you getting letters? Do you read that? All sorts of stuff. In the monetary policy decision in a 2024, it was very clear that the inflation was going to hit that lovely two and a half percent bull's-eye target for the reserve bank at the end of this year or towards the end of this year. Well, we're getting towards the end of this year. We're nowhere near it. And it's a lot of it's not demand pushing up inflation. A lot of this stuff is cost-push. It is the cost of health insurance. It is the cost of renting. It is the cost of building a new home, electricity prices, gas prices, all sorts of stuff. And people are pulling their hair out. And they're saying, "When are we just going to be able to stop worrying about rising prices? Because it's getting to people." And it's not cool. It's really not cool. And we'd like to be able to grow the economy and actually have the highest standard of living without worrying about pushing inflation. This is a key thing. You said there is a speed limit to the economy, and unfortunately it's very low at the moment. Normally, the economy grows sort of 4 or 5% you'd expect inflation to rise. But at the moment, we're growing it sort of 2%, 1.5% and inflation's rising. So the speed limit of the economy is awful. And that's all down to productivity. I don't want to go into definition of productivity. But basically, saying that if we can work better, if we can work smarter, if we can use AI, if we can use better manufacturing equipment. If we can work out how to work less, and produce more, then we can start expanding the economy without inflation. It's a really hard message for Michelle Ballucte to get across. It's a really hard message because it's just, you know, people are going, "Well, I'm exhausted. I can't work any harder. It's not about that. It's not about that. It's about having the economy work smarter at a lower cost." And we haven't been able to do it. And we've had a productivity commission set up to achieve it. We still haven't been able to do it. So that's the key message. We need to improve productivity and we need to be able to the economy to withstand all these, you know, the lack of competition in the economy, which gives companies the power to raise prices more than we would like. Fix all that and then you can start getting higher wages and then inflation's time and you can start to save and you can start to live a better life. But that to me is the kind of the subtext of it all. Before we go, you know, I thought it was interesting. She was asked about AI and obviously that is something that keeps coming up in this productivity conversation. Is this the panacea? Like, is this, are we going to finally break through on productivity? I thought it was interesting. Michelle Bullock has a reverse mentor on AI. I don't know if you caught this. So my interpretation of this is a junior staff member is coaching Michelle Bullock on how to use AI to make her day more productive. She got laugh because she was saying I'll use AI to maybe anticipate your questions. Everyone thought, "Oh, that's interesting. I actually did look behind. I'm not going to mention her name, but I looked behind in that exact moment to the head of communications at the RBA just to see her reaction to that. She was laughing for what it's worth. But yeah, I think that Michelle Bullock is. It's a conservative organisation. She said that by its nature, but I'm sure if I want AI making it straight to decisions. We'll see." Yeah, and definitely not asking our questions for us. No, no, no. That's it for today's episode of ABC Business Daily. We'll be back with another episode tomorrow. Make sure you're following us on ABC Listen or wherever you get your podcasts. And if you'd like to send in a question, email ABC Business Daily at abc.net.au. See you later, DT. See you guys.