Capital management largesse continues at Commonwealth Bank with an increased dividend and a further share buyback. The economy is busy enough for CBA to lift volumes, contain costs and therefore increase earnings even in a low interest rate environment.
Operating income increased 2% in the period due to strong volume growth in home loans (+7%) and business loans (+12%), partially offset by lower insurance income from higher weather claims. Operating expenses were held steady as lower remediation costs offset higher staff costs and investment spend.
CBA said that net interest margins would remain under pressure (fell to 1.92% in 1H22) until the RBA’s cash rate begins to rise. This scenario is becoming very likely heading into 2H22 and beyond and CBA’s economic outlook is anticipating the cash rate to reach 0.75% as at 31 December 2022 then 1.25% by June 2023. CBA is sitting on about $170 billion of low rate deposits that will add to the NIM over the medium term as rates rise.
Credit risk remains a non-issue with the total loan impairment expense ratio at a miserly 2bp in 1H22 and provisioning remains strong.
The bank’s capital position has been clipped back to 11.8% due to higher dividends, the $6 billion 1H22 off-market share buyback, offset by rising cash earnings and the sale proceeds from Colonial First State. The capital position is still in a very strong position allowing the Board to announce a further $2 billion on-market share buyback.
The dividend reinvestment plan (DRP) remains in place (no discount) and will be neutralised by an on-market repurchase of shares. CBA continues to target a full year payout ratio of 70-80% of cash earnings.
CBA’s economic outlook for Australia is upbeat considering low unemployment, significant household savings, solid exports and further investment in infrastructure and non-mining industries. The main concern is on rising inflation.
Investment view
Fundamentally, CBA is in good shape but remains stubbornly expensive relative to its Australian peers. Granted, there seems to be less cause for much concern at CBA while other banks deal with more pressing problems.
The highly competitive home lending market has kept pressure on margins but CBA has sustained its market leading share in this important segment. As mortgage rates inevitably begin to rise in earnest this year, CBA will be carefully watching its loan book for signs of stress, particularly in Western Australia which already stands out.
CBA’s FY22 PE ratio sits just above 20x, well above NAB and WBC (14x) and ANZ at 13.2x while its sub-4% net dividend yield is below the peer range of 5-6%. But many retail shareholders will be comfortable with the strong market position and steady performance.
We maintain our Hold recommendation on CBA. Our preferred bank exposure is NAB.
