Commonwealth Bank: Pleasing with positive read-throughs

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
10 February 2021, 3:00 PM
Sectors Covered:

  • Commonwealth Bank of Australia (ASX:CBA) has reported cash NPAT of $3,975m, 3.9% better than our expectation. An interim dividend of $1.50 per share fully franked has been declared.
  • The result is pleasing with positive read-throughs for the other major banks.

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Good operating income outcome has positive read-throughs

CBA’s 1H21 operating income is 2.2% better than we expected. The 1H21 net interest margin (NIM) of 2.01% is in line with our expectations.

While we continue to expect the low interest rate environment and the front to back book mortgage pricing impact to remain substantial NIM headwinds in 2H21F, we see enough offsetting tailwinds (discussed inside) such that we expect the NIM to remain broadly stable.

There is good momentum in home lending at the moment with CBA calling out December and January as particularly strong months for volumes.

CBA’s domestic business lending (excluding institutional lending) growth of 4% over 1H21 was better than we expected.

CBA also posted strong Markets income in the Dec-20 quarter. The strong Markets outcome and strong home loan growth over the Dec-20 quarter bode well for upcoming Dec-20 quarter trading updates from the other major banks.

Credit impairment charge pleases

CBA’s loan loss rate has reduced from 48bps in 2H20 to 28bps in 1Q21 to 17bps in 2Q21; this downtrend bodes well for the upcoming Dec-20 quarter trading updates from the other major banks and we expect consensus credit impairment charge forecasts for FY21 to be reduced in the aftermath of these trading updates.

CBA increased its collective provision coverage of credit risk weighted assets from 156bps at Sep-20 to 158bps at Dec-20, a move which we view as being conservative given improvement in the macroeconomic outlook.

Were it not for this top-up, the loan loss rate for the Dec-20 quarter would have been even lower.

As we expected, CBA is remaining conservative with provisioning as it awaits the impact of the roll-off of temporary fiscal stimulus measures and as it awaits commencement of a vaccine roll out in Australia and New Zealand.

CET1 ratio exceptionally strong

CBA’s CET1 ratio of 12.6% as at Dec-20 is sitting very strong relative to APRA’s ‘unquestionably strong’ benchmark of 10.5%. A further 32-42bps of CET1 uplift is expected from completion of announced divestments.

Previously, CBA’s base case scenario for adverse credit risk weighted asset (CRWA) migration involved a ~70bps adverse impact on the CET1 ratio; however, this impact has now been revised to zero under the base case scenario.

We have consequently favourably revised our CRWA inflation forecasts for CBA and there is now an increased likelihood of making similar revisions to our CRWA forecasts for the other major banks in due course.

We are now forecasting off-market share buybacks for CBA of $5bn in FY22F and $5bn in FY23F.

Investment view and changes to forecasts

We have increased our cash EPS forecasts by 3.5%/2.4%/6.0% for FY21F/FY22F/FY23F respectively.

We retain a Reduce recommendation. Our target price, based on our DDM valuation, increases from $64.00 (login to view target price).

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