CBA shares jump 6% on back of strong dividend
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More news: Commonwealth Bank shares jumped 6.36% at the open to break $168 per share after its half-year result beat market expectations.
UBS analyst John Storey said the result appeared "conservative struck" but argued that core performance was better reflected by a 2.6% improvement on pre-provision operating profit, rather than the 5% beat of consensus estimates.
In a note sent before the ASX session opened, Storey said CBA's business bank was the standout division, up 14% year on year and up 8% on the half, contributing 42% of the bank's overall cash net profit.
"The stock's reaction at open will likely depend on whether the market focuses on the NIM miss and increased costs or prioritises the ongoing strength in lending and deposit growth, combined with a favourable credit environment, to balance these concerns," he said.
Early trading would suggest the latter, with Totality market strategist Aaron Zanchetta noting the market would like strong credit quality across CBA.
"Underlying margins were slightly compressed amid competitive pressures, but the bank's raised interim dividend reflects confidence in earnings resilience and capital strength," he said in a separate note.
CBA review says bank must remain vigilant on cultural issues
More news: Alongside its half year result, the Commonwealth Bank has published the findings of an independent review into the remedial action plan (RAP) it commenced following its 2018 APRA enforceable undertaking.
The report, completed by consultant Promontory in January, said it had continued to monitor work inside CBA to address key issues since a period of "adverse publicity and regulatory scrutiny" in 2017.
It noted that, by 2021, CBA had delivered on all of Promontory's recommendations, but it had continued to engage with the bank, with the latest report confirming expectations within the bank had not “slipped back” or “stood still”.
“Promontory’s overall view is that the outcomes achieved through the RAP have been sustained,” it said.
It noted cultural drivers responsible for CBA’s historic shortcomings had included “a widespread sense of complacency; a reactive stance in dealing with risks; insularity and a failure to learn from experiences and mistakes; and an overly collegial and collaborative working environment".
“While Promontory does not consider there to be evidence of these markers present at CBA, continued vigilance remains essential,” it said in the report.
“CBA continues to operate within a series of inherent tensions, including protecting its organisational reputation while pursuing growth and innovation, balancing a learning culture with consequence management, and setting effective guardrails without becoming overly prescriptive and removing the ability to exercise judgement,” Promontory said.
“At an organisational level, CBA has generally navigated these tensions effectively. However, given the scale and complexity of CBA’s operations, the ongoing challenge remains.”
Jarden unimpressed with 'expensive' CBA after interim result
More news: Jarden analyst Matt Wilson has labelled the Commonwealth Bank's interim result "uneventful" as segments of the market struggle to justify the major's valuation amid tightening competition.
What they said: Acknowledging CBA had delivered a reliable result from a strong balance sheet in a note sent around on Wednesday, Wilson called the bank "too expensive" noting the bank's net interest margin was shrinking while providing limited guidance to the market.
Wilson pointed to Macquarie, which provided a trading update earlier this week, as heaping pressure on CBA and the other major banks as it threatens to erode their deposit base. The majors require customers to meet additional conditions before they are paid bonus interest rates — a strategy from which Macquarie has deliberately diverged.
"[Macquarie's] unequivocal liability-led strategy is clearly set to prey on these low/no costs deposits… how do the majors respond when IT has removed the historical moats?" Wilson said.
He maintained a "sell" rating on the bank with his price target of $100 per share well down from its last traded price of around $159.
Commonwealth Bank beats expectations as cash profit jumps to $5.44b
The news: The Commonwealth Bank has posted a first half cash net profit of $5.44 billion, beating expectations as Australia's biggest bank continues to win on deposits and lending.
The numbers: CBA's cash profit rose 6% on the previous corresponding half, while its statutory net profit of $5.41b was up 5%. Pre-provision profit also rose 5% to $8.13 billion, well in front of market consensus.
While it called out the strength of its core businesses, the bank acknowledged intense competition amongst the majors was having an impact. The bank's net interest margin (NIM) compressed by 4 basis points over the half to hit 2.04% as the bank noted increased competition in home lending and lower income from the bank's treasury and markets unit.
CBA will pay a $2.35 interim dividend fully franked, up 4% on the first half of last year, and coming in at a payout ratio of 74%.
Return on equity rose to 13.8%, 10 basis points higher than the first half of last financial year, to keep it ahead of other major rivals. In doing so, it beat expectations with consensus indicating RoE would fall to 13.13%, according to Visible Alpha.
Operating expenses came in at $6.72b, up 5% on the previous first half as the bank recorded a 44.7% cost-to-income ratio. The bank attributed the increase to inflation and increased resourcing for its lending teams, as well as a 10% lift in investment spending to $1.2 billion as part of ongoing modernisation and AI efforts.
Its common equity tier one capital ratio of 12.3% was flat on the previous half, and north of the APRA required minimum of 10.25%. Loss impairments ran into $319 million, flat on the previous half, to produce a loss rate of just 6 basis points. CBA said credit quality had improved and mortgage arrears had reduced on the back of lower interest rates and seasonal tax refunds.
What they said: “Economic growth strengthened during the half, driven by increases in consumer demand and rising investment in AI and energy infrastructure,” CBA chief executive Matt Comyn said in a statement.
“Supply side constraints meant that the economy is struggling to meet this increased demand. As a result, inflation is now expected to remain above the Reserve Bank’s target band for some time, placing further upward pressure on interest rates.”
The context: CBA's result, seen as a barometer of the Australian economy, came in broadly ahead of expectations as the major continues to grow its retail bank above system.
The bank has increasingly been in a two-way race with Macquarie to capture the majority of deposits and home loan growth, while making inroads on NAB's hallowed business bank.
In the middle of last year the bank's share price broke through $190 earning it the title of one of the world's most expensive banks as analysts found its valuation increasingly divorced from its fundamentals. More recently the share price has fallen back to earth to sit just under $159, slightly down on where it was 12 months ago.
The market beat comes one day after Macquarie posted a strong third quarter update, and ahead of Westpac providing its own quarterly update on Friday.
The sources: ASX, Promontory Report
