Commonwealth Bank: Result 2012

We last upgraded Commonwealth Bank in Commonwealth Bank on the buy list on 12 Aug 10 (Long Term Buy – $50.73), as we expected a growing dividend stream would help yield a satisfactory total return in the absence of large capital gains. That’s still our view despite Commonwealth’s record profit.

Cash net profit increased 4% to $7.1bn, with earnings per share increasing 2% to $4.49. Total operating income increased 2% to $20bn, with the company blaming timing differences for the 1% fall half over half. Return on equity fell 0.9% to 18.6%, due to unfavourable financial markets that chief executive Ian Narev warned will have a larger impact on Commonwealth’s results in future.

A fully franked final dividend of $1.97 was declared (ex date 20 Aug), up 5%, bringing the full year total to $3.34 and putting the company on a fully franked dividend yield of 6%. Commonwealth will distribute 70% of interim profits as dividends in future, which should smooth out the current gap between the interim and final dividends without increasing dividends overall.  

Bad debts continue to fall, particularly within BankWest which has proven to be a shrewd acquisition. While profit margins are being squeezed due to the competition for deposits, credit growth is currently high enough to eke out higher profits as the banking industry tries to cut costs in the face of more stringent capital requirements.

While many important factors remain out of a bank’s control, under chief executive Ian Narev Commonwealth Bank remains the best of the big four banks in our view. It has a huge customer base, familiar brands, and is about as well prepared for any economic turbulence as you could expect from a highly leveraged financial institution. The reliance on overseas wholesale funding remains an Achilles' heel, but with the share price increasing 10% since 17 May 12 (Hold – $50.72) we’re sticking with HOLD for up to 5% of a well diversified portfolio.