Cba Forced To Dump Buyback

THE Commonwealth Bank yesterday suspended its $400 million share buyback to preserve capital and avoid the need to ration lending to customers in the face of the worsening global credit crunch.

With its rival ANZ having warned that the liquidity crisis meant that rationing credit - either through pricing or by amounts lent - was now a real possibility, the Commonwealth called a halt to its buyback to keep the lines of credit open.

The unusual move came as the bank became the third of the top five institutions to top up its lending and deposit rates. In the Commonwealth's case it has lifted lending rates as much as 0.35 percentage points - 10 basis points higher than last week's Reserve Bank increase in cash rates.

The Commonwealth's home borrowers on its standard variable rate will now pay 9.32 per cent for their mortgages after it topped the new rates imposed by National Australia Bank and Westpac, which both went above the RBA with increases of 0.29 and 0.3 percentage points respectively. Their mortgage rates now sit 5 basis points below the Commonwealth's.

But the moves failed to stem the slide in the bank's share price which has been hit, along with that of its rivals, by the prospect of increased provisions for bad debts and the impact of the liquidity crisis on the sector's profits.

Last night, Commonwealth shares closed a further 65c down at $38.70 while its main rivals all slipped as the ASX 200 dropped another 1.59 per cent.

The bank's decision to hang on to the $400 million it had set aside to fund its dividend reinvestment plan came after international investor road shows last week by chief executive Ralph Norris and finance director David Craig to sell its recent credit-crunch-affected profit result. Mr Norris went to New York and Mr Craig to London. Both returned with the same message: that the liquidity crisis which has seen funding dry up across the globe is not only getting worse but will continue for longer than first expected.

Banks are finding reasonably priced funding hard to come by just as the demands on them for lending have increased dramatically. Companies have turned to the banks for financing since they, too, are unable to source affordable credit from gridlocked debt markets.

But while their security is a major plus, the banks have faced a blowout in spreads - the difference between official rates and the rate at which money markets are prepared to lend.

Higher financing costs of at least 77 basis points over base in the short-term, 90-day markets have pushed out those in the long-term three-to-five year sectors.

Westpac last week paid 105 basis points for a three-year bond issue which last year would have cost it only 13 basis points over the base rate. The result is that interest rates are likely to remain high until banks lock into longer-term financing.