Commonwealth Bank: High quality but remains overpriced

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
10 February 2022, 9:30 AM
Sectors Covered:

  • Commonwealth Bank (ASX:CBA) has announced 1H22 cash NPAT of $4,846m, 12% better than we expected and ~10% better than consensus. The beat has been driven by a strong revenue outcome and credit loss provision release.
  • An interim dividend of $1.75ps fully franked has been declared.
  • We retain a Reduce recommendation on valuation grounds.

Forecasting 8bps NIM decline in next half before expected improvement

Given that net interest margins are the main area of softness for the banks sector at the moment, NIMs are attracting much attention from investors.

CBA’s Group NIM contracted by 17bps from 209bps in 2H21 to 192bps in 1H22, which is 2bps better than we expected but appears to be ~3bps worse than consensus.

The key drags on underlying NIM movement have been the shift in mix of the Australian home loan book towards fixed rate home lending as well as the lag in repricing of fixed rate home loans relative to the dramatic increase in swap rates over the Dec-21 quarter. The combined impact of these two factors was a 6bps drag on NIM movement from 2H21 to 1H22.

CBA has today said that it expects the fixed rate proportion of the Australian home loan book to increase further and peak in 2H22F. The associated NIM headwinds are therefore likely to again be seen in 2H22F.

However, we expect these headwinds to disappear in 1H23 as flows into fixed rate home loans reduce in percentage terms. The prospect of the RBA increasing the official cash rate is also beneficial for the NIM outlook. 

We are forecasting an 8bps decrease in CBA’s NIM from 1H22 to 2H22. The composition of this forecast is shown inside this report.

Net interest income growth in both Business and Institutional beats Retail

While the Retail Banking Services (RBS) division achieved above-system home lending growth of 5% over 1H22 and strong transaction deposit growth of 14%, 1H22 net interest income for the division is down 1% compared to 2H21 and flat compared to 1H21.

The net interest income performance of the Business Banking division is more exciting with growth of 3% relative to 2H21 and 3% relative to 1H21. This growth is partly courtesy of strong business lending growth of 5% over 1H22 and stable business lending margins. This element provides a positive read-through for NAB.

The net interest income performance of the Institutional Banking & Markets division is also better than the RBS division. IB&M achieved net interest income growth of 3% relative to 2H21 and 2% relative to 1H21.

Asset quality remains sound

There was a credit impairment benefit of $75m in 1H22 with CBA reducing collective provisions by ~$250m over the half. Individually assessed provisions reduced by $108m over the half.

CBA’s collective provision coverage of credit risk weighted assets reduced from 1.39% at Jun-21 to 1.30% at Dec-21. This coverage remains ~30% higher than pre-pandemic levels.

Further capital management announced

CBA has reported a CET1 capital ratio of 11.8% as at 31 December 2021. This is 30bps less than our expectation largely due to a greater-than-expected increase in risk weighted assets in relation to Interest Rate Risk in the Banking Book (IRRBB).

Nonetheless, CBA’s CET1 capital position remains strong with ~$6bn of surplus CET1 capital relative to APRA’s ‘unquestionably strong’ benchmark.

CBA completed a $6bn off-market share buyback in 1H21 and has today announced a $2bn on-market share buyback.

We are forecasting a further $2bn of buybacks in FY23.

Investment view and changes to forecasts

We have increased our cash EPS forecasts by 6% and 3% for FY22F and FY24F respectively. 

Our target price, based on our DDM valuation, is (login to view).

Retain Reduce recommendation.

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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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