CBA: Q1 Update
Recommendation
Commonwealth Bank's latest result, for the quarter ended 30 September, had much in common with the recent full-year results of its peers: little growth, higher expenses, and lower impairments.
Compared to the quarterly average during the prior half, CBA's operating income rose 1%, expenses grew 7% (or 1% excluding 'one-off' costs), and impairments fell to a mere 0.11% of total loans. It was a good result overall, with a 3% rise in underlying cash profit of $2.5bn.
Home lending growth of 3.1% was below that of the total market of 3.6% (both on an annualised basis). However, we're more interested in the bank appropriately managing risk and margins especially as the housing market is in decline in many parts of the country. On that point, CBA is doing well, with household deposits, which provide a cheap form of funding, rising 8.9% on an annualised basis. CBA has the largest share of such deposits and it's a competitive advantage.
It comes at a good time as funding costs have risen, particularly on wholesale sources (ie as opposed to deposits), putting pressure on net interest margins across the industry. We'd expect CBA to be less affected, although it did say margins were down (without revealing by how much).
CBA's common equity tier 1 ratio of 10% is below the 10.5% required by APRA by the start of 2020. Several business divestments will take this up to 11.2%, though, so CBA is likely to return some of the excess capital to shareholders.
CBA is the premier retail banking franchise in Australia. It has market-leading profitability and deserves a premium valuation. That said, it's well above our Buy price, which stands at around 1.6 times book value, so we recommend you HOLD.
*Please note our recommended maximum portfolio weightings of 8% for CBA individually and 20% for the banking sector as a whole. More conservative investors and those with other exposure to the property market should use lower limits.