The CBA result has been taken favourably by the market, and it is indeed a modest beat to consensus expectations ($4.5bn expected, vs $4.7bn actual). We are less constructive.
The beat is being driven by the negative loan impairment expense, which is a “hollow log”, to be unwound as COVID related losses normalise (or in this instance the losses feared at the start of COVID have not occurred, hence the write-backs).
Operating income growth is virtually nil, and has been for many years now.
The high headline cash NPAT growth is a function of the depressed previous comparable period; the half on half sequential growth was slightly negative (see the right hand side of the graph below).
Flat to down profits when loan impairment expenses are negative does not confer a wildly positive outlook, which would be fine, if the valuation was likewise more modest.
However, it is not. The banks line up pretty well on a regression to fundamentals (which calculates an implied P/B, plotted against the actual P/B).
CBA a notable outlier. In this instance, below the line is expensive. Virgin would screen as cheap.
It is the same when we expand the analysis to look at global peers, with CBA trading at a noticeable premium to peers when controlling for ROE differences. In this instance, above the line is expensive.
There are still plenty of reasons to like CBA. It is the best bank, operationally speaking.
It has the best balance sheet…
…and enjoys the better funding mix.
It is consistently more profitable, due to size, scale, and technological efficiencies…
…but all of that is, to our mind, in the price, and more.
Group NIMs have been stable over the past few years (hovering around 2%) but are now slowly coming under pressure.
CBA’s NIM fell by 17bps relative to 2H21, and 14bps on 1H21. The WBC and ANZ quarterlies likewise pointed to lower NIMs, falling ~8bps on an underlying basis. WBC guided to further falls, and the common commentary between the banks is of higher mortgage competition, rising short term funding costs, wages growth, a rising proportion of lower spread fixed rate mortgages and the impact of holding higher quality liquid assets.
Given that we are in a period of very strong credit growth (a clear macro-tailwind) the inability of the banks to “make hay” whilst the sun is shining suggests to us that searching for opportunities largely outside the banks remains a compelling preference.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.