Commonwealth Bank: Enough to please in trading update

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
13 November 2019, 2:56 PM
Sectors Covered:
Banks

  • CBA has announced 1Q20 unaudited cash earnings from continuing operations of $2.3bn. On a run-rate basis, this is ~3% better than we expected. However, some of this beat is the result of one-off benefits in the quarter, including a favourable movement in the derivative valuation adjustment (DVA) and assets sales in the Structured Asset Finance (SAF) business.
  • We find the update to be pleasing with an increase in net interest income, pleasing home loan and business loan growth in the current environment, asset quality looking sound overall, and no new customer remediation-related provisions.
  • We have made no material changes to our cash EPS forecasts. Despite our view that CBA is a relatively good quality business, we continue to view CBA’s current share price as expensive relative to the other major banks.

Operating income growth of 4%

On a run-rate basis, operating income increased 4% from 2H19 to 1Q20, with net interest income up 3% and non-interest income up 7%. Home loan growth was 2.5% annualised over 1Q20 and business lending growth (in the Business and Private Banking division) was 2.8% annualised over the quarter.

We infer that the net interest margin (NIM) increased from 2H19 to 1Q20; we continue to forecast a flat NIM from 2H19 to 1H20F.

The strong increase in non-interest income was the result of timing differences and one-off items including a favourable movement in the DVA, assets sales in the SAF business, higher insurance income from fewer weather events/claims, and higher global markets sales.

We are forecasting a reduction in cash earnings from 1Q20 to 2Q20F due partly to these one-off benefits in 1Q20.

Operating expenses up but jaws positive

On a run-rate basis, operating expenses (ex notable items) increased 2% from 2H19 to 1Q20 due to higher staff costs and IT amortisation, partly offset by business simplification savings.

Including notable items, expenses decreased 9% ver the same period due to the non-recurrence of the substantial customer remediation provisions taken in 2H19.

Asset quality sound and capital strong

The credit impairment charge for 1Q20 is $299m (16bps of gross loans).

We continue to forecast a charge of $660m for 1H20. Consumer arrears improved over the quarter due to seasonality and the benefit of higher tax refunds.

Troublesome and impaired assets increased slightly over the quarter to total $8.1bn.

CBA has said Corporate Troublesome assets continue to reflect weakness in discretionary retail, construction and agriculture, as well as single name exposures.

The CET1 ratio was 10.6% at Sep-19; this is down from the Jun-19 ratio of 10.7% due largely to the payment of the final dividend (-90 bps).

Investment view and changes to forecasts

We have made no material changes to our cash EPS forecasts. We retain a Hold recommendation. Our target price, based on our DDM valuation, is unchanged (Morgans Clients can login to view detailed reports and price targets here). Key downside risks to our target price include a material increase in funding costs and greater-than-expected asset quality deterioration.

More information

Morgans clients can login to view our detailed report and increased share price target for Commonwealth Bank (CBA). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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