CBA/Commonwealth Bank

For the economy, this is the graph that matters (arrears, 90dpd). The grind higher in arrears is modest, and, at that sort of run rate, would take quite a while to imperil the economy. You really need falling house prices for it become threatening, from a macroeconomic perspective.

Now, we do think that’ll happen, and so we are underweight Australia and underweight the banks, but the reality is nothing bad has happened yet. The warning signs are there, with 30 DPD kicking higher, and hardship cases climbing, and things could well get out of hand quite quickly (noting today’s poor employment print), but it’ll require those 30DPD to roll into the 90DPD, and, for customers to experience difficulty in selling the underlying home to cause actual loan losses (recouping the full amount should be relatively straightforward).

So that’s good.

However, from the stock perspective, these are the graphs/tables/data that matter. It’s on closer to 20x forward PE, with flat to down profits, which, in our view, is very punchy for a bank, and as such, we don’t hold it.

Not holding CBA is where most our banking sector underweight comes from. The yields from the sector are attractive, and they are very well capitalised, in an economy where a slowing consumer has not yet shown up in worsening arrears, but we stay underweight through the CBA zero holding.

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