Commonwealth Bank (CBA) is the nation’s largest bank by market capitalisation, holds the greatest amount of deposits, the most home loans, and also controls a fair chunk of the wealth management market through Colonial First State.
The financial stock also operates Australia’s largest discount online brokerage operation, Commsec, as well as a multitude of international operations.
Importantly, the bank has used its size to grow even bigger over the years. While many financial institutions collapsed over the global economic downturn – or neared collapse – CBA used its massive deposit base to maintain funding and buy depressed assets.
The banking giant also has diverse exposure geographically with stakes in several banks in the fast growing China.
3rd Quarter Trading Update
CBA last month reported a third quarter unaudited cash profit of $1.75 billion, a 2.9% increase on the prior corresponding quarter.
The results come after the company had a record first half cash profit of $3,576 million, which was a 7% jump on the prior year.
The group warned not only in its first half update, but also in its March quarter update, that higher funding costs have reduced its margins.
However the updates from the bank covered periods before the RBA cut the official cash rate twice for a total of 75 basis points.
CBA only passed 61 points of these cut, we believe that these should help alleviate some of banks margin pressures.
Last week Moody’s downgraded 15 major global banks, with Bank of America, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley also receiving at least a one notch cut its long-term debt rating. Credit Suisse was downgraded three full notches.
Spanish and Brazilian banks recently had their ratings cut with Spain obviously suffering major downgrades after the government had to borrow money to keep the banks adequately capitalised.
However the Australian banks continue to be rated amongst the highest in the world, all four remain within their AA credit rating band.
Moody’s said that our banks “don’t engage in capital markets business and in particular higher-risk activities, like proprietary trading. They are focused on traditional lending for residential mortgages and the corporate sector.”
With the Australian banks in such good condition, and some of the last few AA rated banks globally, they are in a better position than most to borrow funds from wholesale markets.
CBA said in its quarterly update that it is in a strong position, which continues to enable them to take a long term view of business. This is important as the bank continues to expand its presence in the growing Asian region.
We believe that the bank’s worries of higher funding costs would have subsided or at least eased with the two consecutive rate cuts by RBA.
The bank also remains one of the most attractive of the big four banks, with an average return on equity (ROE) over the last three years of 17.4%, a full 2% higher than any of its rivals.
With three quarters of its fiscal year completed, CBA is on track to be the first Australian bank to make a profit on over $7 billion and we look forward to seeing CBA’s continued success translate into continued gains for its share price.
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