The booming housing market and a robust economy have provided the conditions for CBA to pay a confident dividend and announce a share buyback, but the COVID clouds simply refuse to disperse, keeping a lid on the benefits to shareholders.
Cash earnings of $8,653 million was 19.8% ahead of last year, supported by a better economy resulting in a lower loan impairment expense. The bank saw volume growth in all its core businesses.
The full year dividend of 350cps equated to a payout ratio of 71% which is at the lower end of the bank’s 70-80% target range.
CBA announced a $6 billion off-market buyback to reduce its surplus capital representing about 3.5% of the issued share capital. The buyback roughly matches the $6.2 billion of asset sales since 2018 but is only about half of the excess capital generated by the group.
The company noted the ‘resilience of the domestic economy’ notwithstanding recent public measures to contain COVID-19. But the buyback could have been much larger and signals the bank’s caution about the potential for what it calls ‘potential stress events’.
After the buyback, CBA will still have surplus capital of approximately $7.5 billion with the CET1 pro forma capital ratio down to 12.1%, still comfortably ahead of APRA’s “unquestionably strong” level of 10.5%. The excess gives the Board flexibility for future capital management initiatives.
The Australian retail banking market is dominated by the ‘big four’, but within that, CBA is a clear leader. Just over 1 in 3 Australian use CBA as their main financial institution which sets the base for its clear leadership in home lending with 25.3% of the market ($492 billion home loan balance at 30 June 2021).
Loan loss provisions were once again quite remarkable at just 7bp – the lowest level in 10 years.
Operating expenses grew 4.4% during FY21 as CBA added more people to develop its digital capabilities, and to deal with the burgeoning area of risk and compliance issues.
The financial fallout from the banking Royal Commission is almost complete. The cumulative cost to CBA for remediation and program costs is just over $3.2 billion comprised of about $2 billion in customer refunds and $1.2 billion of cost to manage the whole process.
Investment view
The company’s outlook was suitably vague, with a nod to the strong regulatory and financial system but a wink to the uncertainty still hanging about from COVID-related economic impacts. CBA has kept plenty of dry powder aside in case things take a turn for the worse and will simply focus on trying to improve its own products, people and processes. While this sounds less than ambitious, there is plenty of organic growth available as demonstrated in this year’s result despite the low interest rate environment. CBA’s economic outlook says the Australian economy will contract in Q3 of CY21 but rebound in 4Q CY21 with the vaccine rollout a key element. CBA’s view is that the impact on the economy from lockdowns will simply push growth out by 6 months with 2022 likely to be a strong year.
The stock has performed solidly through the pandemic but still looks fully priced. We maintain our Hold recommendation.
