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11 Aug 2023 - Hedge Clippings | 11 August 2023



Hedge Clippings | 11 August 2023

CBA's results shows what's happening in the 'burbs.

Hedge Clippings wouldn't dream of suggesting we have any credentials as a bank analyst, but over the years (too many to count!) we have been a bank "watcher" or observer. As such, we retain a healthy dose of cynicism for the messages the various banks' boards and spin doctors churn out whilst trying to convince customers and the general population that they're there to help, and are thoroughly easy to get on with. At the same time, we do recognise that between them, banks have their fingers on the pulse of the economy given the data they have access to, even though they may have those same fingers in our pockets!

Things have improved over the years, but as we've also always noted, the only thing worse than a highly profitable bank is one that's losing money. We can still recall Westpac back in 1992, when it lost $2 billion, resulting in Kerry Packer coming to the "rescue" as he and Al "Chainsaw" Dunlap briefly joined the board. Or more recently during the GFC, when the entire banking system was under pressure, resulting in, among other things, then PM Kevin "07" Rudd establishing bank guarantees for depositors to prevent a wide scale run on the banking system. We suspect Ken Henry, who served as Treasury Secretary from 2001 to 2011, was the brains behind that, but full credit to Kevin for implementing it.

Of course, when it comes to self-serving spin, Kevin was an expert, as shown in this self congratulatory piece in the AFR he penned ten years after the event in 2018, carefully glossing over some of the less successful aspects of his term(s) as PM. To be fair, although not entirely as a result of Rudd's doing, Australia did dodge a GFC led recession, a feat no other developed economy managed.

We digress. Back to the CBA's result, and specifically the spending patterns of their customers, and any implications that can be found relating to a recession - or lack thereof - in the current environment. Page 11 of CBA's investor presentation indicates a sound lending picture supported by the strong labour market: Troublesome & Impaired Assets are up slightly YoY, but lower than they were in FY 2019. Home loan arrears are marginally down YoY, (0.47% vs 0.49%) but well down on 2019 (0.68%).

The CBA presentation confirmed what most anecdotal evidence has been indicating - there's a two speed economy running, or at least two different economies based on age demographics. The younger the customer, and therefore presumably those with lower savings, the tougher it is, so they're reining in spending, even compared to 3 months ago. Meanwhile, those over 35, and particularly those over 65, have increased savings YoY, and those over 55 and 65 have increased their card spending YoY (who uses cash anymore?) with the latter 2 groups spending more now than even 3 months ago.

Not everything in the garden is rosy however, with one third of rate increases still to be felt. Even so, 90+ day mortgage arrears are below June '20, '21, and '22, as are 30+ day arrears, albeit the latter has kicked up slightly (0.92% vs 0.82%) as one would expect over the past 12 months. Overall, the number of cases of hardship across all personal credit has dropped by 27% since the pre-COVID average.

On balance, given the RBA seems to have called a halt to further rate rises as inflation's taken a turn for the better, and employment remains strong, the outlook for the economy, while muted, is positive. The 2/3rds of home owners without a mortgage are happily spending, and don't seem overly stressed by inflation around the 5% mark, possibly remembering what real inflation was in the last century.

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