Commonwealth Bank of Australia, the country’s largest home lender, says it is unable to guarantee matching any further reduction in official interest rates.

Financial markets are fully pricing a further quarter of a percentage point reduction in the Reserve Bank of Australia’s (RBA’s) cash rate when its board meets next month.

“We can’t be in a position to make any comment,” Commonwealth Bank of Australia’s James Sheffield told a parliamentary hearing in Canberra.

“The volatility in the market is huge at the moment,” he told parliament’s house economics committee which is conducting and inquiry of competition in the banking and non-banking sectors.

“You have got to wait for the theoreticals to become real and make a decision, balance out the interests of our customers, obviously pass on as much to our customers as we can afford, but you must also bear in mind we are on very turbulent waters at the moment.”

Retail banks did match the RBA’s rate cut earlier this month, the first reduction by the central bank in nearly seven years.

“waiting for the banks to have a rights issue. I wonder if there is an economic cycle that started in 1990 and is starting again now’.

James this is a great question and much beyond the scope of a couple of paragraphs but let me try and in any case it is useful to talk about the banks as they are the source of so much misery and conjecture of late.

 have chosen ANZ to look at as it is representative of three of the major banks – except CBA which was still a government corporation back in the 80’s and to look at the 90’s technically we need some history.

Let’s look at a chart going back to the 80’s:

click chart for more detail

But I also want to look at the chart how it looked in the 90’s and this is the beauty of ProfitSource as it allows you to step back into history:

click chart for more detail

As you can see there was a wave four happening and eventually it did recover but you can see from the next chart that ANZ moved sideways for almost 15 years:

click chart for more detail

 not implying for one moment that the banks could range trade for the next 15 years but I do expect them to take some time to recover.

James I could not say we will see the banks do a rights issue and frankly it would have to be so well priced to win the confidence of shareholders and rights issues have their dangers too as they can force price down even further.

One thing I do note about banks is that all of the big four have had major first and second line management reshuffles – some unforeseen and the Instos are just a little wary about the banks ability to really inspire at a time when it is most needed.

SHARES in ANZ fell 11 per cent in early trade after the bank flagged a $1.2 billion second half credit provision and said its annual profit could fall by up to a quarter.

At 10.18am (AEST), ANZ (anz.ASX:Quote,News) shares had fallen $1.89, or 10.65 per cent, to $15.86 after dropping as low as $15.40.  By noon its shares were down $1.80, or 10.14 per cent, at $15.95.

ANZ fell about 9 per cent on Friday after banking stocks were dragged down by National Australia Bank (nab.ASX:Quote,News) announcing a $830 million additional write-down linked to investments in US mortgage debt.

ANZ’s expected $1.2 billion second half provision adds to a $980 million provision booked in the first half.

The bank said today the the losses were expected to drive its annual cash earnings per share down by between 20 and 25 per cent. The bank said its 2008 cash profit was likely to be over $3 billion and it expected to maintain its full-year dividend at 136 cents per share.

Provisions are ’sensible’ move

Federal Treasurer Wayne Swan said it was sensible of ANZ to make provisions for potential losses, adding he was satisfied with the level of disclosure.

“These potential losses come from decisions, investment decisions, poor investment decisions taken over a period of years, as well as the fallout from the global financial market events.”

He said it’s important for chief executives and boards of banks to accept responsibility for their circumstances.

“From day one, this Government has said that it is important that financial institutions declare their positions.

“That sort of transparency is very important and that’s what we’re seeing today.”

He said the fact major banks were making extra credit provisions shows Australia is not immune to developments in global financial markets, but added the local banking system was robust.

“I think we shouldn’t lose sight of the fact that we do have a strong, well-regulated banking sector which is capable of withstanding the fallout from these international developments.”

NAB fell $1.11, or 4.18 per cent, to $25.45, Commonwealth Bank of Australia fell $2.25, or 5.2 per cent, to $41.00 and Westpac fell $1.19 or 5.39 per cent, to $20.90.