Commonwealth Bank of Australia (CBA)
HOLD

Rising premium

 16 Nov 2022
Sector: Financials

1Q23 TRADING UPDATE

Need To Know

  • Solid trading update showing an acceleration of earnings growth, bad debts remain benign
  • Positive jaws: 9% revenue growth vs 4.5% costs growth
  • Valuation premium vs peer banks close to all-time highs.

Trading update reads well, positive jaws (revenue growth > cost growth) driving a 2% improvement in earnings vs two prior quarter run-rate.

Implies the market's estimate of $10.3bn cash earnings for FY23E is easily achievable (particularly if there are further rate rises ahead). 

CBA increasingly managing for margin, with housing volumes now growing below system.

Bad debts continue to remain a non-issue (at this point).

Investment Implications

CBA’s strong execution post-Royal Commission continues to result in strong operating performance.

Absent from the trading update was any mention of what margins CBA achieved over the quarter.

The 12% improvement in operating earnings combined with good cost control continue in the quarter implies margins have risen (as per recent commentary for peer banks). We expect further margin improvement through 2023.

The bank sector remains in earnings upgrade mode. Since August 2022, CBA FY23E EPS estimates have been upgraded +8% vs peers' 8-11%, as the benefit from higher interest rates begins to feed into earnings. 

CBA PER premium vs peers is now heading back towards all-time highs. In our view, the better value lies in National Australia Bank (NAB) and Westpac Banking Corp (WBC) at present.

We rate CBA a Hold. 

Figure 1: CBA PER premium vs major banks is approaching all time highs

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Stock overview

Share Price

Company overview

Commonwealth Bank is Australia’s largest retail bank.

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