Slowing momentum

3Q23 TRADING UPDATE

Need To Know

• 3Q cash earnings +2% ahead of market
• Bad debts remain low, 7% below market
• 3Q Net Interest Margin (NIM) estimated at 2.04% vs 2.10% in December

Bank quarterly updates contain limited information and are open to each Bank’s interpretation of what is relevant. In that context, the CBA 3Q update receives a Pass grade.

Unaudited cash earnings were +2% ahead of market expectations, benefiting from a lower BDD charge whilst ongoing NIM pressure limits operating leverage. Whilst NIM was not disclosed, we estimate NIM is running at ~2.04% during 3Q23. The market was expecting 2.07% for the 2H23. 

Like NAB, CBA’s exit NIM for March will be lower again – in part driven by deposits growth ahead of loans. CBA’s news today is that it is stepping back from offering cashback in mortgages from 1 June, which we think reflects the soft margin outcome and the fact that CBA has the largest funding task of the majors.   

Bad debts charge came at just $223m or 10bps of gross loan assets vs market expectations of ~$300m. Provision coverage remains strong, whilst asset quality saw only a small deterioration in the quarter.

Capital remains strong at 12.1% at the end of 3Q, or some $9bn ahead of minimum capital requirements. CBA has around $1bn of its $3bn on-market share buy-back outstanding.

Overall, 3Q is likely to result in low single-digit EPS downgrades for 2H23 on NIM margin outcomes alone.

Investment View

CBA’s share price has underperformed the market CYTD, trailed only by NAB amongst the big four. Slowing operating momentum and premium valuation has worked against CBA this year.  

The key question going forward is whether CBA’s premium valuation can hold. At 2.2x book value, similar to where the multiple was in early 2022, we are becoming more sensitive about CBA’s 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 operating performance and share the buy-back program. In the absence of a clear deterioration in economic conditions over the next quarter, an upsized share buyback program is likely at FY23 Result.  

Figure 1: CBA’S P/B PREMIUM VS PEER BANKS REAMIN. CURRENTLY TRADING AT 2.2X, AROUND THE LONG-TERM AVERAGE. 

Figure 2: CBA’S PER PREMIUM REMAINS, TRADING 0.5X SD ABOVE THE LONG-TERM AVERAGE. ANZ AND WBC TRADE AT 11X PER

Figure 3: CBA’S DIVIDEND YEILD AT 4.5%, NOW AT IT’S NARROWEST GAP TO 10YR GOVERNMENT BONDS IN OVER A DECADE