Commonwealth Bank Chief Warns Of Two Years Of Credit Gloom

The Age
27 June 2008
Danny John

THE fallout from the global credit crisis that has increased borrowing costs in Australia could last for another two years, the head of the country's largest bank has warned.

In one of the gloomiest verdicts on the crisis, Commonwealth Bank chief executive Ralph Norris yesterday told a conference in Sydney that the liquidity crunch would be felt for at least another year and could play out into the middle of 2010.

While market conditions had improved since the US Federal Reserve bailed out investment bank Bear Stearns in March, Mr Norris said the global credit crunch was still hurting economies around the world.

Echoing comments last week by his counterpart at ANZ, Michael Smith, who saw no immediate end to the lending downturn, Mr Norris said: "It's a situation that is obviously very fragile.

"From my perspective, I would suspect that it's going to take at least another 12 months, possibly two years ... for this particular crisis to work its way through." Mr Norris' comments came as three of Commonwealth's rivals - St George, Bank of Queensland and Bendigo and Adelaide Bank - supported its view at a UBS banking industry conference that overall lending growth was tailing off.

The crippling of international credit markets began almost a year ago because of the US subprime mortgage disaster.

The increased risk of taking on debt from those markets has pushed interest rates to high levels.

Higher bank borrowing costs have translated into steeper Australian home-loan rates, which now stand 40 basis points above the increase of 100 basis points in the official cash rate imposed by the Reserve Bank since November. This has coincided with a big rise in fuel prices and curtailed consumer spending. And with business borrowing also slowing in the face of higher interest charges, growth in the domestic economy has begun to erode.

Mr Norris said there was no doubt this was happening, although he was more positive about the Australian economy than the US economy, which some commentators say has tipped into recession.

Nonetheless, he was cautious about the result of higher interest rates on domestic economic prospects.

"The real unknown is exactly what the RBA's tightening will do to this outlook, along with increases in oil and food prices and international wholesale funding costs," he said.

While St George, the Bank of Queensland and Bendigo and Adelaide Bank indicated that overall lending growth was slowing, they believed they were weathering the uncertain conditions as businesses and households reduced their demand for new credit.

The banks are increasing their market share of home lending because other providers are finding it difficult to compete with the big increase in deposits the banks are using for discounted mortgage offers.

The deposits are increasing because of a "flight to quality" as people pile their money into the banks for safe-keeping.

The credit card market is one area that is tracking lower for the banks.

It has taken a hit because consumers are reducing their spending on discretionary and luxury items, normally the first things to go when pressures on household budgets tighten.

The yearly increase in credit card balances has slowed to 10%, its lowest level of growth since 1994.

Commonwealth Bank said this was a reflection of a lowering of confidence rather than problems faced by consumers in repaying their loans.

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