Analysts were pleased to see Commonwealth Bank report earnings that were above consensus forecasts but the better than expected result was not enough to prompt any of them to give the bank a ratings upgrade. CBA remains in a neutral/underperform/hold pattern, with “modest” earnings growth forecast for the year ahead.
UBS has maintained its ‘neutral’ rating, with a 12-month price target of $83 a share (Friday’s close was $80.50). It has forecast growth in earnings per share of 3 per cent in the 2017/18 financial year.
Macquarie Securities has maintained its ‘underperform’ recommendation, with a 12-month stock price target of $80.50. It has forecast growth in CBA’s EPS of just one per cent in 2017/18.
Morningstar has maintained a ‘hold’ recommendation, with a fair value estimate of $85 a share. Its forecast is for EPS growth of 2.2 per cent in 2017/18.
The analysts all believe the bank’s problems over money laundering accusations will have minimal impact on earnings but will be an unwelcome distraction for management.
CBA reported net profit of $9.9 billion for the year to June – an increase of 8 per cent over the previous corresponding period.
Earnings per share were up 4 per cent. Return on equity fell from 16.5 per cent in 2015/16 to 16 per cent for the year to June.
Net interest income rose 4 per cent to $17.6 billion and other banking income rose 14 per cent to $5.5 billion (this included a one-off gain of $397 million from the sale of Visa shares).
The net interest margin fell from 2.14 per cent in 2015/16 to 2.11 per cent in the year to June. Excluding the volatile treasury and markets operations, NIM was up two basis points in the second half, thanks to improved funding and deposit costs.
Total operating income rose 5 per cent to $23.1 billion. Operating expenses were up 6 per cent to $11.1 billion.
The bank’s loan impairment expense fell 13 per cent year on year to $1.1 billion. As a proportion of gross loans and acceptances it was the bank’s best bad debt performance in 10 years.
The bank declared a final dividend of $2.30 a share, taking the total dividend payout for the year to $4.29 a share – a 2 per cent increase over the previous corresponding period.
The dividend payout ratio was 75 per cent and the dividend yield in the current price range 5.3 per cent.
Macquarie Securities: The bank’s second half result was underpinned by improved margin and highly supportive credit quality trends
With the proprietary mortgage sales channel showing further signs of improvement, mortgage re-pricing benefits and an improving competitive landscape, the outlook for margin in the year ahead looks favourable.
“We estimate that the benefit from mortgage re-pricing to group margins will be around 10 basis points in 2017/18,” Macquarie says.
However, given management’s desire to invest, the impact of the bank levy, dilution from additional shares and anticipated normalisation of impairment charges, Macquarie’s EPS growth forecast is around one per cent.
Macquarie liked the fact that the bank’s common equity tier one capital ratio was 10.1 per cent and is on track to meet APRA’s new target of 10.5 per cent through organic capital growth.
UBS: Reduced reliance on mortgage brokers was a highlight. “We have long been concerned about CBA’s increased reliance on mortgage brokers, which had risen from 31 per cent of group mortgage originations in 2012 to 50 per cent last year,” UBS says.
However, over the past year the bank’s broker originations fell sharply to 43 per cent (38 per cent if Bankwest is left out of the equation).
“We see this as a positive sign because it shows that the bank can leverage its large customer base, distribution strengths and analytics. It also puts the bank in a better position to negotiate lower mortgage broker commissions, which we expect to see.”
UBS says another positive is anticipated NIM expansion in the year ahead, following recent mortgage re-pricing. Generally, banks are facing NIM pressure but CBA has demonstrated a willingness to use pricing power to steady its NIM.
The anti-money laundering allegations are likely to be an ongoing drag on the bank’s reputation, provide unwanted management distraction and lead to elevated costs. It will be challenging for CBA to outperform.
Morningstar: The 16 per cent return on equity was a highlight. The $2.30 a share full franked dividend was another. The bank is paying a yield of more than 7 per cent on a grossed-up basis.
CBA should be able to maintain modest future earnings growth, underpinned by leading market shares in key product segments, such as home loans, household deposits, credit cards, wealth and online broking. Annual loan growth will slow modestly.
