- We will be looking for 1H19 cash earnings of $4,919m when CBA reports its result on the 6th of February. We expect an interim dividend of $2.01 per share fully franked to be declared.
- While we expect subdued credit growth to weigh on CBA's revenue in 1H19, revenue will receive some support from home loan repricings in early October.
- Beyond 1H19, industry liaison suggests to us that system home lending activity has improved in January compared with the Dec-18 quarter as a result of APRA removing limits on investor loan growth and interest-only loans; this bodes well for the outlook of system home loan growth.
- Retain Add recommendation.
Expecting continued run-off of low-returning insto exposures
APRA's Monthly Banking Statistics released this morning show that CBA's non-financial corporations loan book contracted over the six months ended 31 December 2018; as a result of which we suspect that CBA continued to run off its low-returning institutional exposures in 1H19.
While we have consequently reduced our 1H19 loan growth forecast for CBA, we expect such run-off to support the NIM and ROTE; our 1H19 NIM forecast has increased as a result of this factor.
Also on the NIM, we expect it to be supported in 2Q19 by the 15bps increase in CBA's Australian variable home loan rates which became effective on 4/10/2018.
Not expecting anything too nasty on the credit quality front
We are forecasting a slight increase in the credit impairment charge from 2H18 to 1H19, partly because it appears to us that CBA has a $120.5m secured exposure to RCR Tomlinson which went into voluntary administration last November.
On the home lending front, while we will not be surprised to see an increase in residential mortgage impaireds driven by an increase in hardship cases, we do not expect this to translate to a material increase in provisions.
Medium-term cost reduction
CBA flagged at the time of its FY18 result release that there will be a much sharper focus on reducing the cost base over the medium term.
With the sale of CFSGAM and the intention to demerge the wealth management and mortgage broking businesses, we expect there to be a greater focus on improving the ROE of the core banking businesses in Australia and NZ, particularly through cost out.
We will continue to gauge the emphasis on cost reduction when CBA reports its result next week.
Investment view and changes to forecasts
We have reduced our cash EPS forecasts by 0.9%/1.5%/1.6% for FY19F/FY20F/FY21F respectively largely due to lower loan volume forecasts.
We retain an Add recommendation. Our 12-month target price is available for Morgans clients only.
Key downside risks include a material increase in funding costs and greater-than-expected asset quality deterioration.
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