Commonwealth Bank: Spotlight on capital management

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Senior Analyst
Date posted:
20 January 2020, 11:50 AM
Sectors Covered:
Banks

  • CBA is scheduled to report its 1H20 result on the 12th of February. We are forecasting 1H20 cash earnings of $4.434bn and a fully franked interim dividend of $2.00 per share. Our forecasts assume no customer-remediation related charges; the potential for such charges to be incurred poses downside risk to our forecasts.
  • We continue to forecast a $2.5bn off-market share buyback (although other forms of capital return are possible) in 1H21F.
  • We have reduced our FY20F cash EPS by 0.8% as we expect a rise in general insurance claims due to the bushfires.
  • Despite our view that CBA is a relatively good quality business, we view CBA’s current share price as expensive relative to the other major banks (Morgans clients can login to view target price)

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Expecting flat NIM 

We are forecasting CBA’s net interest margin (NIM) to be flat at 210bps from 2H19 to 1H20F.

We expect the key NIM headwinds over this period to be the lower interest rate environment and asset pricing; we expect the key NIM tailwind to be basis risk compression.

We are forecasting total loan growth of 1.7% over the half.

Anticipating update on capital management 

At the time of the FY19 results release, the Company said that ‘subject to prevailing operating conditions, potential future capital management initiatives to be considered by the Board could include neutralisation of the dividend reinvestment plan or forms of capital return including an off-market share buyback’.

We will be interested in what the Company has to say on capital management this time around given there is now more clarity on the sale of CommInsure Life and more clarity on increased capital requirements in NZ.

We continue to forecast a $2.5bn off-market share buyback (although other forms of capital return are possible) in 1H21F.

Impact of bushfires 

We will be interested in any comments the Company makes about the impact of the bushfires on asset quality, particularly the asset quality of agri lending.

We expect a rise in general insurance claims due to the bushfires.

Investment view and changes to forecasts

We have reduced our FY20F cash EPS by 0.8% as we expect a rise in general insurance claims due to the bushfires.

We retain a Hold recommendation. Our target price, based on our DDM valuation, is unchanged (Morgans clients can login to view target price).

Key downside risks to our target price include a material increase in funding costs and asset quality deterioration being worse than expected.

More information

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

Disclaimer: Analyst may own shares.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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