CBA
A good result from CBA.
Admittedly, not much can go wrong when collateral values are through the roof, and you have access to essentially free funding. However, the valuation problem remain acute, to our mind.
The below graph compares the forecast return on equity of major global banks, plotted against their respective price-book valuations.
CBA stands out. Now there are lots of things that are great about the CBA business, and the accompanying 138 page slide deck does a good job of highlighting them (biggest by share, highest by net promoter, most satisfied, best apps and so forth).
But eventually, all of those things collapse down to measures like returns and or risk. We see the operational risk profiles as broadly similar, and the operational efficiencies and leverage differentials as embedded in the ROE.
We’ve been waiting for good news regarding the buyback/capital return measures, and had been expecting a positive price momentum effect in the lead in to the result.
Pleasingly, that has occurred, and the stock is also trading up post the result.
On a strictly sector based valuation frame, CBA is at the upper end in both an absolute and relative sense, and at a clear premium to peers, regardless of whether we look at revenue based multiples…
Or asset based ones…
In exchange, an operating performance that is barely 1% higher on the pcp, or 0.30% at the full year, is perhaps a bit rich, to our minds. The NPAT outcome is flattered, as we expected it to be, by an unsustainably low bad and doubtful debt charge (which was negative in the second half with the unwind of prior provisions).
Over the past half decade, earnings growth has proven surprisingly hard to come by, given we’ve seen one of the strongest housing bull markets. The answer is a) increased competition and b) the low interest rate environment and c) the need to hold more capital.
That hasn’t stopped the share price from appreciating, however, and as such the expectations for growth that are embedded in the market capitalisation are quite exuberant, given the observed outcomes for NPAT growth. The odds of CBA disappointing the market over time, by growing less quickly than expected, appears high, to our mind.
Contrast this with the much lower required growth rates of WBC, NAB, and ANZ. Recall here that we calculate the required growth rate from interpolated future earnings, by decapitalising the implied 10 year forward market cap, which is in turn grown from a market like rate of return assumption of 7% CAGR, using a variety of different PE assumptions (historical averages, current PE, and a market PE of 20x).
In ANZ’s case, in order to justify a market like rate of return (~7% CAGR) ANZ needs to simply generate a little bit more net income than they did back in 2015. On a relative basis, this is a more achievable hurdle, than it is for CBA. We make the emphasis relative basis, because we think growth for the banks is firmly challenged in an absolute sense, given our expectations of a slowdown in the residential mortgage market moving forwards.
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