Buying The Big Bank CBA

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 bank 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.

1Q13 Trading Update

Despite facing slowing credit growth, CBA was still able to generate solid earnings growth in 1Q13. The group reported a 1Q13 statutory profit of $1.8 billion.

Unaudited cash profit, a measure more reflective of underlying performance, was $1.85 billion, a 5.7% increase on the prior corresponding quarter.

A breakdown of the results revealed net interest margins (NIM) were broadly stable in the quarter, relative to 2H12 NIM of 2.06%. The company noted that asset repricing impacts were largely offset by continued deposit pricing pressures.

The company’s’ trading income improved to a level consistent with the company’s long-term average run-rate, the result was also helped by a positive Credit Valuation Adjustment. CBA’s asset growth was mainly a function if of increased retail deposits, which now make up of 63% of the group’s total funding.

The Australian Retail division had a particularly good quarter, with improved lending margins, improved credit quality and good growth in customer numbers at its Bankwest subsidiary.

The Wealth Management and Insurance division produced solid volume growth, with Funds under Administration and Funds under Management growing by 6% and 4% respectively. Insurance premiums grew by 3%, with cross selling to the banks retail customer base showed signs of improved penetration.

With regards to CBA’s other division, the bank said most were trending at similar run rates to the 2H12.

Looking ahead

CBA’s quarterly update was solid, with a clearly improved tone from previous periods. Although the company did note slower revenue growth, it did increase profits by over 5%, this is an indication that the group has been able cut its expenses to cover for any reduction in revenue.

On a return on equity (ROE) basis, CBA does look attractive to its major rivals, with an average (ROE over the last three years of 17.6%, which is over 1% higher than any of its rivals.

Overall we expect a continuation of growth for CBA’s earnings in the current quarter, and this should hopefully translate into continued share price appreciation.

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