Whenever a company uses the word “solid” in its press release for its financial results, I know not to get too excited. Because “solid” is a euphemism for “average”.
- On the face of it, the Commonwealth Bank’s (CBA’s) profit result for the financial year just completed was average:
- Cash profit down 2%
- Income flat
- Expenses up 3%.
However, the market liked it because it basically met expectations and there were no nasty surprises. Given that CBA is right up there among the world’s most expensive banks, it is surprising that the market wasn’t expecting a little bit more.
There was some good news with the net interest margin stabilising and bad debt expenses remaining very low, and CBA continued to lead with improvements in customer service and digital experience. Shareholders were rewarded with a slightly higher final dividend of $2.50 per share, taking the full-year payout to $4.65 per share.
So where does CBA’s share price head now?
Let’s take a closer look at the profit result and what the major brokers have to say.
CBA’s profit result
Cash net profit after tax (NPAT) for the full year of $9,836 million was down 2% on FY23. The second half profit of $4,817, due in part to fewer days, was down 4% on the first half.
Income was flat, with small volume growth offsetting a lower but stabilising net interest margin, while operating expenses increased by 3%. Loan impairment expenses reduced from $1,108 million in FY23 to just $802 million in FY24, with the second half coming in even better. Historically, at 9 basis points of the overall lending book, they remain well below the long-term average.
Highlights included:
- Above system growth in business lending volumes.
- An improvement in the second half for home loans, with balances rising following a fall in the first half.
- The stabilisation in the net interest margin, with the second half up 1 basis point on the first half.
- Due in part to ongoing deposit growth, CBA paying off in full the RBA’s term funding facility.
- Continuing improvements in customer service, with the NPS (net promoter score) with consumers growing for eight consecutive months and CBA being “number 1” among the major banks for each of the last 20 months.
- CBA providing its customers with “global best digital experiences” (their words).
- Progress on Artificial Intelligence (AI), with more than 2,000 AI models in use across the bank.
- Very strong position on capital and peer leading provision coverage. CBA’s CET1 capital ratio stood at 12.3%, well above its internal target of 11% and APRA’s regulatory minimum of 10.25%.
On the negative side, CBA’s cost-to-income ratio deteriorated from an average of 43.7% in FY23 to 45% in FY24. The second half came in even higher at 45.2%. A watch point is the deterioration in home loan arrears, as cost of living pressures impact some customers.
The increase in final dividend to $2.50 per share took the overall payout ratio to 79%, just inside CBA’s target range of 70% to 80% of cash profits.
What do the brokers say about CBA?
The major brokers remain bearish on CBA, feeling that it is too expensive relative to its major bank competitors and banks internationally. According to FN Arena, all of the major brokers have a ‘sell’ recommendation (see table below).
The consensus target price is $99.48, a whopping 28% lower than Friday’s ASX close of $138.13.
On multiples, the brokers have CBA trading at 23.3 times forecast FY25 earnings and 22.6 times forecast FY26 earnings and paying a prospective yield of just 3.4%.
FN Arena’s precis of Macquarie’s analysis of the CBA’s result is a good summary of the major brokers’ views on the stock:
“CommBank delivered a clean and credible result, Macquarie suggests. Pre-provision earnings were broadly in line, and earnings quality improved.
Elevated cash rates, resilient credit quality, and sound balance sheet growth should underpin near-term performance. However, when rates ultimately decline, the broker believes margin pressures will re-emerge, putting pressure on earnings.
“At the risk of sounding like a broken record,” (ain’t that the truth!) in Macquarie’s view, this does not justify a 3x book value and 23x earnings valuation.
Acknowledging the absence of a near-term catalyst, and with earnings declining by -2% in FY24 and limited growth prospects in FY25-26, the broker can’t justify the current multiple. Underperform and $95 target retained.”
What’s the bottom line?
This time last year, CBA was trading at $104 On Friday, it closed at $138.13. Not much has changed in that period when it comes to CBA’s outlook – steady, flat earnings. The outlook for FY25 is the same – flat earnings, a less than special dividend yield of just 3.4%.
However, CBA has gone up by 33% because the market has gone up, it has become Australia’s biggest stock by market capitalisation and the institutions (and many retail investors) are afraid to sell it.
I feel a bit like a “broken record” advising clients to sell CBA and then watching the price go up (and being wrong). Eventually, the market will see sense, but how much higher CBA goes in the meantime and when it turns, I don’t know.
A sell for long-term investors.
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