Has CBA’s share price peaked?

Co-founder of the Switzer Report
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The headline in The Australian Financial Review last Thursday summarised how many in the market were feeling in regard to CBA’s half year profit result – “as good as it gets”. They reacted to a graph in the investor presentation suggesting that NIM (net interest margin) peaked in October and comments from CEO Matt Comyn about the “intensity of home loan and deposit price competition”.

CBA’s Group NIM

CBA shares lost 7.6% following the result compared to the ASX 200 which dipped by 1.1%. Not helping sentiment were statements from the Government and the RBA Governor that banks needed to do more to pass on higher rates to depositors, and that the ACCC would be monitoring their response.

But is all bad news? Let’s take a closer look at CBA’s profit result.

December Half-Year Profit

CBA’s cash NPAT of $5.15bn was up 8.6% on the corresponding half in FY22 (1H22) and 6.3% on the previous half (2H22). Stripping out loan impairment expenses (which is starting to normalise), operating performance was even better – up 18.2% on 1H22 and 17.7% on 2H22.

This was thanks to the rise in interest rates and NIM (see graph above – up 0.18% on 1H22 and 0.23% on 2H22), and balance sheet growth (volumes).

Shareholders saw the dividend increase from $1.75 per share (1H22) to $2.10 per share.

Positives

Key positives were:

  • Largely due to revenue growth, the Bank’s cost to income ratio improved by 280 bpts from 45.3% in 1H22 to 42.5% in 1H23;
  • Volume growth was sound. In business banking, CBA grew over the 12 months by a multiple of 1.5 times system growth in business deposits and 1.3 times system growth in business loans. In home loans, where competition in intense, CBA grew at system during the last 6 months, adding a net $13bn in home loans. ANZ and Westpac both added a net $9bn, while NAB added $5bn;
  • CBA’s continued investment and clear leadership in digital;
  • Retail and business deposits now fund 75% of CBA’s book, with the remainder coming from wholesale markets. (In June 2008, deposit funding was only 55%);
  • CBA’s ROE (return on equity) rose to 14.1%;
  • CBA’s capital position is very strong. On a pro-forma basis, CBA’s CET1 ratio is 12.1%, well above the new APRA regulatory minimum of 10.25% and CBA’s target of around 11.0%. As a result, CBA announced an increase of $1bn to its current on-market share buyback.

 

Negatives

The main negative was the apparent peaking in the net interest margin, although CBA was quick to point out that a component of this, earnings on the banks equity hedge and replicating portfolio, will continue to improve as interest rates increase.

The other negative was around expense control. Due to the impact of inflation on wage and IT costs, sequential operating expenses increased by 4.5% over the half year. There was only a limited offset from productivity savings, suggesting that the Bank has more work to do to on expense management.

What do the brokers say

The brokers remain negative on CBA, seeing it as too expensive relative to its peers. According to FN Arena, there are four “sell” recommendations and three “neutral” recommendations, as per the table below.

The consensus target price is $91.66, 9.2% less than Friday’s closing ASX price of $100.97.

The brokers have CBA trading on a multiple of 16.5 times FY23 earnings and 16.6 times FY24 earnings. (CBA’s major bank peers are on multiples around 12.0 times). On a forecast dividend of 430c per share, it is yielding 4.3%.

Macquarie’s analysis of the CBA result and outlook is a good summary of how the brokers feel:

“ Macquarie suggests caution regarding the margin outlook overshadowed the strong first half performance from CommBank. Management appears conservative regarding the changes to deposit mix, elevated mortgage competition and rising funding costs.

Despite the appeal of the business, the likelihood of earnings downgrades makes the current multiple difficult to justify, in the broker’s opinion, and an Underperform rating is maintained”.

Bottom line

There is no doubt that the brokers are negative on the stock…………..but this has been the case now for several years. And there is no doubt that CBA is super expensive compared to its major bank peers. But it is also the stock that the fund managers “go to” when they want to top up their bank holdings, particularly after a period of market weakness.

My sense is that CBA can continue to modestly grow earnings, supported by volume growth and expense management, offset by a small decline in net interest margin and higher provisions for loan impairment losses. It will continue to attract a premium for its annuity like status. Around $100 it is more in buy territory than sell territory. Hold.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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