Housing Funding Costs

Funding Costs for Home Loans

12 June 2009

1

Overall Funding Costs continue to increase •

The cost of long term wholesale funding is still at record levels

•

As old wholesale funding matures and is replaced by new more expensive funding, the Bank average cost of funding continues to increase.

•

The cost of retail funding has been increasing significantly as banks compete aggressively on deposits.

CBA home loan rate remains very competitive •

Throughout the credit crunch, CBA has retained a very competitive standard variable home loan rate.

•

Even with a 10bp increase, CBA has equal lowest standard variable rate of all the major banks

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Standard Variable Rate Comparison SVR 5.64% 5.74%

CBA CBA (after change) ANZ NAB Westpac St George

5.81% 5.74% 5.81% 5.79%

Suncorp BankWest Bank of Queensland Bendigo HSBC

5.80% 5.70% 5.89% 5.90% 5.74%

Source: Canstar Cannex

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CBA Standard Variable Home Loan Rate - comparison 10.00%

0.30%

9.00%

0.25% Standard Variable Home Loan Rates [use LHS]

8.00%

0.20%

7.00%

0.15%

6.00%

0.10%

CBA ANZ

5.00%

0.05%

4.00%

0.00%

3.00%

-0.05%

NAB SGB

2.00%

-0.10% -0.15%

1 Jun 09

1 May 09

1 Apr 09

1 Mar 09

1 Feb 09

1 Jan 09

1 Dec 08

1 Nov 08

1 Oct 08

1 Sep 08

-0.20% 1 Aug 08

1 Jul 08

1 Jun 08

1 May 08

1 Apr 08

1 Feb 08

1 Jan 08

0.00%

1 Mar 08

CBA’s Standard Variable Home Loan Rate Vs Average of other majors [use RHS]

1.00%

WBC

CBA’s Standard Variable Home Loan Rate is currently 0.15% less than the average of other majors 4

Funding Costs for Variable Rate Home Loans

Funding Cost for Variable Rate Home Loans

=

Cash Rate + Long Term Funding Cost

+

Basis Risk Cost

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Long Term Funding - Costs have increased from Aug 07, and still remain very high Credit Spreads for AA Australian bank senior debt in Secondary Markets 2.750% 2.500% 2.250% 2.000% 1.750% 1.500%

AA Aust Banks 5yr - not guaranteed

1.250%

AA Aust Banks 3yr - not guaranteed

AA Aust Banks 3yr - domestic guaranteed incl. fee

1.000%

AA Aust Banks 5yr - domestic guaranteed incl. fee

0.750% 0.500%

The cost of long term wholesale funding has increased by over 1.10% since June 2007

0.250%

1 May 09

1 Apr 09

1 Mar 09

1 Feb 09

1 Jan 09

1 Dec 08

1 Nov 08

1 Oct 08

1 Sep 08

1 Aug 08

1 Jul 08

1 Jun 08

1 May 08

1 Apr 08

1 Mar 08

1 Feb 08

1 Jan 08

1 Dec 07

1 Nov 07

1 Oct 07

1 Sep 07

1 Aug 07

1 Jul 07

0.000%

Source: CBA Spectrum and CBA Group Treasury

6

Basis Risk Cost – has reduced in recent months but remains high 1.00%

0.80% Cost of OIS (spot) 0.60%

0.40%

Cost of OIS (3mth moving average)

0.20%

Long term average cost of OIS prior to Credit Crisis 0.00% Jun 07

Aug 07

Oct 07

Dec 07

Mar 08

May 08

Jul 08

Sep 08

Nov 08

Jan 09

Mar 09

May 09

•

The majority of the Bank’s funding is priced by reference to BBSW rates. BBSW rates are wholesale market reference rates set daily, and are fixed rates for a period of months (eg typically 3 months). The difference between BBSW rates and the official cash rate (referred to as basis risk) has been extremely large and extremely volatile.

•

The Bank uses Overnight Index Swaps (OIS) to manage this Basis Risk.

•

The cost of OIS swaps has also increased dramatically since the start of the Credit Crisis.

•

Note: LIBOR (London Interbank Offered Rate) does not affect Australian banks – BBSW is the Australian equivalent of LIBOR.

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The cost of funding the home loan portfolio will continue to rise as the older cheap term funding matures and must be replaced by more expensive new term funding

Total wholesale funding costs 9.0%

8.0% Portfolio Long Term Funding Cost OIS cost - the cost of hedging BBSW and Cash Rate

7.0%

Funding Cost: June 2007 = 0.20% May 2009 = 1.04% June 2010 = ~ 1.46%

6.0%

5.0%

4.0% Official Cash Rate

3.0% Forecast Period: assumes all market rates remain steady throughout 2009-10 2.0% 30 Jun 07 30 Sep 07 30 Dec 07 30 Mar 08 30 Jun 08 30 Sep 08 30 Dec 08 30 Mar 09 30 Jun 09 30 Sep 09 30 Dec 09 30 Mar 10 30 Jun 10

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Funding Costs for Fixed Rate Home Loans

Funding Cost for Fixed Rate Home Loans

= Fixed Interest Swap + Rate Long Term Funding Cost

9

3 Year Fixed Interest Swap Rate

8.00%

7.00%

6.00% 3 year sw ap rate

3 year swap rate has increased 0.80% in 4 months

5.00%

4.00%

This period saw reductions in fixed home loan rates due to decreases in the fixed interest swap rates

3.00% Target Cash Rate 2.00% 1-Jul-08

1-Oct-08

1-Jan-09

1-Apr-09

10

Deposit Funding – Extreme Competition has driven up costs Average Interest rates on deposits v cash rate 8.00%

7.00% Official Cash Rate

6.00%

5.00%

4.00%

Deposit Interest Expense 3.00%

2.00%

1.00%

0.00% Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Apr 09

Note: this is note the same as reported deposit margin which is based on internal transfer pricing that reflects swap rates, basis risk and long term funding premiums

11

Retail Term Deposit Rates are well above wholesale rates Headline Term Deposit rates v 6 Month BBSW 10.00%

Current 6 month TD rate of 3.8% v 6 Month BBSW of 3.3% 8.00%

6.00%

6 month BBSW 4.00%

2.00%

0.00% Margin to BBSW (average per month)

May 09

Apr 09

Mar 09

Feb 09

Jan 09

Dec 08

Nov 08

Oct 08

Sep 08

Aug 08

Jul 08

Jun 08

May 08

Apr 08

Mar 08

Feb 08

Jan 08

Dec 07

Nov 07

Oct 07

Sep 07

Aug 07

Jul 07

Jul 07

-2.00%

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Source of funding CBA FY09

Deposit Funding Retail Funding

Long Term Wholesale maturing in next 12m

Short Term Wholesale

Long Term Wholesale maturing after 12m

Structured Funding with first call <12mth

Securitisation

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Australian Banks have passed on much larger rate cuts than overseas

* From start of easing cycle to end December 2008.

Source: RBA

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