Commonwealth Bank: Further confirmation of positive themes
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 12 May 2021, 2:30 PM
- Sectors Covered:
- Commonwealth Bank of Australia (ASX:CBA) has announced unaudited cash NPAT of ~$2.4bn for 3Q21. We have not materially changed our cash EPS forecast for FY21. Profit before provisions (excluding remediation costs) is ~5% better than our expectation. The net interest margin (NIM) and bad debt charge outcomes both appear to be better than consensus expectations.
- CBA’s CET1 position remains strong and we continue to forecast $10bn of offmarket share buybacks over FY22F and FY23F. CBA has today said that the timing and extent of potential capital management “is dependent upon a continued trend of domestic economic improvement, our ongoing assessment of portfolio credit quality and regulatory guidance”.
- Our view remains that CBA is a high-quality bank but overvalued. Retain Reduce.
Operating income pleases
Operating income, on a run-rate basis, increased 2% from 1H21 to 3Q21, better than our expectation for it to be broadly flat. Better-than-expected net interest income has partly been driven by strong growth in domestic business lending.
While CBA has not quantified the NIM for the quarter, it has said that the NIM improved from 1H21 to 3Q21. We estimate that the NIM increased by 1bp over this period, which is in line with our expectation.
Non-interest income for 3Q21 is also better than our expectation, growing 3% (on a run-rate basis) from 1H21 to 3Q21 courtesy of volume-driven increases in CommSec and higher retail banking fee income from improved consumer spending levels.
Costs higher than expected
While we were looking for a reduction in operating expenses, they increased by 1% (on a run-rate basis) from 1H21 to 3Q21 after excluding remediation costs.
Including remediation costs – which we estimate to be ~$150m in 3Q21 – relating to legacy wealth and banking issues, operating expenses were 2% higher. CBA has said that the underlying increase reflects a stronger investment spend profile and higher volume-related costs.
Credit impairment benefit looks better than consensus
There is a credit impairment benefit of $136m for 3Q21. This benefit is lower than we expected, as we were expecting CBA to reduce its collective provision (CP) coverage of credit risk weighted assets (CRWA) from 158bps at Dec-20 to 140bps at Mar-21; however, CBA only reduced this coverage to 151bps at Mar-21.
While the coverage of 151bps allows CBA to still say that it has the strongest such provisioning coverage of the major banks, we believe 151bps is too conservative given the improvement in asset quality and macroeconomic outlooks.
Investment view and changes to forecasts
We have not materially changed our cash EPS forecast for FY21 due to remediation costs largely offsetting an underlying upgrade. We have increased cash EPS by 1.8%/1.7% for FY22F/FY23F respectively largely due to higher non-interest income forecasts.
Retain Reduce recommendation. Our target price, based on our DDM valuation, improves slightly (login to view).
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