Commonwealth Bank of Australia (CBA)
HOLD

Masterclass

 15 Feb 2023
Sector: Financials

1H23 RESULT

Need To Know

  • Surprise $1bn upgrade to $2bn share buyback 
  • Earnings in-line with the market. Margins are up a healthy 18bps to 2.10% a new cycle high for CBA
  • Result will not call into question CBA’s premium valuation

CBA has delivered a masterclass in banking, delivering clean earnings result with numbers in-line with the market. Stronger volume growth, at 18bps lift in Net Interest Margins (NIM) helping.

Small dividend surprise resulted in a 35cps lift in the dividend vs 2H22 to 210cps. The addition of a further $1bn to the existing $2bn share-buyback program is a clear surprise to both us and the market.

This result is hard to fault.  We expect only small EPS upgrades from the market post-result.  

1H23 Result

Cash earnings $5.15bn vs $5.2bn market

Pre-provision earnings $7.8bn vs $7.7bn market

Cash EPS $3.04 vs $2.98 market

DPS $2.10 vs $2.08 market. 70% payout ratio vs 62% 1H22

Buyback +$1bn vs a clear surprise. 

Tier 1 capital (CET1) 12.1% under new capital rules 1 Jan 23. CBA guiding to through-cycle CET1 >11%

Outlook: ‘We expect business credit growth to moderate and global economic growth to slow during 2023…optimistic that a soft landing for the Australian economy can be achieved…’ 

Investment View

CBA share price has strongly performed this year up 8%, with the share price not far from all-time highs heading into these results. Expectations were high and despite a clean result and upgraded share buy-back program, the Result itself is not the catalyst to rerate the share price higher in our view.

The key question going forward is whether CBA premium valuation can hold?  At 2.6x book value, up from 2.2x in early 2022, we are becoming more sensitive about CBA valuation – particularly as the economy cools and the full impact from higher interest rates, and falling house prices are yet to be reflected through bank earnings.

We resist the urge to downgrade our Hold rating given CBA’s strong underlying operational momentum and expanded share buy-back program which we expect to start to post the end of the Result blackout period.

Our preferred bank exposures are Westpac Banking Corp (WBC) and National Australian Bank (NAB).

Figure 1: CBA price to book ratio is unlikely to expand from here

View the latest Research Report

Stock Overview

Share Price

Company Overview

CBA is a financial services provider with a presence in Australia, and New Zealand. It offers personal and business banking services, investment services, insurance, and more. 

Disclaimers and Disclosures

Issuer

The information and opinions contained within Sandstone Insights Research were prepared by MST Financial Services Pty Ltd (ABN 54 617 475 180, AFSL 500557) ("MST").

Reliance

Whilst MST make every effort to use reliable, comprehensive information in the construction of its reports, MST make no representation, warranty or undertaking of the accuracy, timeliness or completeness of information in this report. Save for any statutory liability that cannot be excluded, MST and MST employees, representative and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person.

General Advice

Any advice contained within Sandstone Insights Research is general advice only and has been prepared without taking into account any person’s objectives, financial situation or needs. Any person, before acting on any advice contained within Sandstone Insights Research, should first consider consulting with a financial adviser to assess whether that advice is appropriate for their objectives, financial situation and needs. 

General Disclosures

This report should be read in conjunction with MST Disclaimers and Disclosures and is published in accordance with MST Conflict Management Policy which are available on the MST website: https://www.sandstoneinsights.com.au. 

Currency of Research

The recommendations made in a Sandstone Insights Research report are current as of the publication date. If you are reading a report materially after publication, it is likely that circumstances will have changed and at least some aspects of the analysis may no longer hold.

Access and Use

Any access to or use of Sandstone Insights Research is subject to the Terms of Use. By accessing or using Sandstone Insights Research you hereby agree to be bound by our Terms and Conditions and hereby liable for any monies due in payment of accessing this service. In addition you consent to us collecting and using your personal data (including cookies) in accordance with MST Privacy Policy, including for the purpose of a) setting your preferences and b) collecting readership data so MST may deliver an improved and personalised service to you. If you do not agree to MST Terms of Use and/or if you do not wish to consent to MST use of your personal data, please do not access this service.

Equities Research Methodology

Please click here for information about MST equities research methodology.