Commonwealth Bank: 1H22 result preview

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
20 January 2022, 12:00 PM
Sectors Covered:

  • Commonwealth Bank (ASX:CBA) is scheduled to report its 1H22 result on 9 February 2022.
  • We are forecasting 1H22 cash NPAT of $4.320bn, 2% below Visible Alpha consensus of $4.406bn.
  • Given the significant NIM contraction reported by CBA in the Sep-21 quarter, we expect there to be much focus on CBA’s 1H22 NIM. We expect 1H22 NIM to miss consensus.

Expecting NIM to miss consensus

By way of refreshing clients on CBA’s significant NIM contraction in 1Q22, we calculated that the Group NIM contracted by 14bps from 2.04% in 2H21 to 1.90% in 1Q22. Excluding the build in average liquid assets from 2H21 to 1Q22, we calculate that the Group NIM contracted by 7bps over the same period.

We calculate that average liquid assets increased by ~$33bn from 2H21 to 1Q22. We expect a $5-10bn reduction in liquid assets in 2Q22 as surplus funding is used to replace maturing term wholesale funding.

Excluding liquids, we inferred that the NIM contraction was driven predominantly by home lending competition and mix. Based on APRA’s monthly banking statistics, it appears that CBA grew owner-occupier (OO) home lending faster than investor home lending over 1Q22, contributing to the adverse mix impact on NIM.

Furthermore, we presume that fixed rate home lending grew faster than variable rate home lending over 1Q22, also contributing to the adverse mix impact on NIM.

However, between 30/9/2021 and 30/11/2021, it appears that the rate of growth in CBA’s OO home lending has slowed such that OO growth was roughly the same as investor growth over this period. Moreover, ABS industry data shows that the percentage of new housing loans accounted for by fixed rate loans has declined from Aug-2021 to Oct-2021, based on which we presume that CBA has grown variable home lending at a faster pace than fixed rate home lending since the end of 1Q22.

Putting these two points together, while we expect the negative NIM momentum from pricing and mix in 1Q22 to carry through to 2Q22, we do not expect the negative momentum to become more pronounced in 2Q22.

Our 1H22 NIM forecast of 186bps compares with Visible Alpha consensus of 191bps. We therefore see risk that the market will be disappointed on the NIM front. Further details of our 1H21 NIM forecast are provided inside.

Looking for above-system loan growth

APRA’s monthly banking statistics show that CBA grew its Australian home lending by 3.8%, or 1.3x system home lending growth, from Jun-21 to Nov-21.

CBA’s Australian business lending appears to have grown by ~4% over from Jun- 21 to Nov-21, which looks to be in line with system business lending growth.

More optimistic than consensus on 1H22 operating expenses

CBA reported a 3% increase in the run-rate of operating expenses (excluding remediation costs) from 2H21 to 1Q22. We expect this increase to be 2% from 2H21 to 1H22 as a result of our expectation of greater annual leave usage in 2Q22. However, we are more optimistic than consensus on this front as consensus appears to be factoring in a 3% increase from 2H21 to 1H22.

Balance sheet

CBA completed a $6bn off-market share buyback in October 2021. We are forecasting a further off-market share buyback of $6bn to be conducted in FY23F.

On asset quality, we expect to see continued sound portfolio asset quality in 2Q22. We are forecasting a 1H22F credit impairment charge of $162m, which is more optimistic than consensus of $285m.

By way of outlook for asset quality, we will be particularly interested to hear about what CBA is seeing on the SME front with the spread of Omicron.

Investment view and changes to forecasts

We have made no changes to our earnings forecasts.

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

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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