CBA

Generally speaking, these past few bank results have not shown not a lot of NIM leverage.

Rates only recently went up, so NIM impacts are more a next quarter or next half story.

That said, more or less all this (the below NIM bridge, showing NIM compression by driver over the past half) should unwind over the next six months, assuming BDDs behave.

For example, from management commentary we already know the higher proportion of lower margin fixed rate loans, the swap rates (costs to the bank) repricing quicker than mortgage rates (the assets to the bank), and the deposit mix and pricing are somewhat in reverse, at the moment, with more variable loans being written, swap rates peaking, deposits not going up by as much as new loan rates.

Indeed, you could imagine +5bps NIM expansion each quarter over the next year, as those headwinds turn to tailwinds, assuming the economy doesn’t tank under the weight of higher rates.

That last line about the economy really is everything, however. Banks are a leveraged play on the economic cycle, and whilst we’ve all often said, “BDDs can’t get any lower”, surely after today’s negative loan impairment expense print this is true.

Lastly, the punchline. Nothing in the CBA result should or can account for such a large premium to peers, both domestic and international, in our mind.

We have a modest sectoral underweight, mindful of the possible strong rates leverage, and would use (ideally) bank strength to rotate into other names with better prospective returns. However, we are quite convinced that CBA is overvalued and hence don’t have any.

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.