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Commonwealth Bank FY20 Result – Expected Result In Challenging Operating Environment

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Commonwealth bank of Australia (ASX: CBA) is the largest bank and publicly listed company in Australia. CommBank has a market capitalisation of A$130 billion.

 

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What are the key results from CommBank FY20 report?

CommBank’s cash net profit after tax for FY20 is A$7,296 million, down 11.3% from FY19. Operating expenses for FY20 is A$10,895 million, up 0.7% from FY19. Loan impairment expenses for FY20 is A$2,518 million, up 91% from FY19. CommBank will pay a final dividend of A98 cents (fully franked). This brings the total FY20 dividend (interim and final) to A$2.98 (fully franked). Net interest margin for FY20 is 2.07% down 2 bpts from FY19.

The fall in CommBank’s cash net profit after tax was mainly due to higher COVID-19 loan impairment expenses. CommBank notes during the peak there was around 154,000 deferrals in their home lending business. As of 31 July 2020, there was around 135,000 deferrals (8% of accounts) in their home lending business. It was also noted that during the peak there was around 86,000 deferrals in their business lending business. As of 31 July 2020, there was around 59,000 deferrals in their business lending business.

CommBank also reported a slight reduction in their net interest margin. This was mainly driven by lower average interest rates (cash rate) in FY20 compared with FY19. However, this lower interest rate margin was slightly offset by cheaper short-term funding costs. The current cash rate is 0.25%, which has been the cash rate since March 2020. Interestingly, the RBA has noted that they do not plan on increasing the cash rate until Australia reaches full employment (4.5% unemployment) or inflation exceeds the 2-3% range. These scenarios are likely to not occur for several years. Therefore, it is likely CommBank will continue to operate in a low interest rate environment.

Regarding CommBank’s capital ratio, CommBank currently has a 11.6% (APRA Level 2) Common Equity Tier 1 capital ratio. This capital ratio is still above APRA’s ‘unquestionable strong’ capital ratio of 10.5%.

What is the outlook for CommBank?

In terms of the economic outlook, the Australian economic outlook is bleak. CommBank notes that GDP growth in 2020 calendar year is expected to be negative 4.2% and Australia is in a recession. Unemployment is currently 7%, with RBA expectations unemployment will increase to around 10% towards the end of 2020 calendar year.

Even though the Australian economy is facing a major contraction this calendar year, CommBank’s capital position remains strong and provides enough liquidity to navigate through this environment.

In comparison to the other major banks such as Australia and New Zealand Banking Group (ASX: ANZ), National Australian Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), CommBank’s HY20 result is significantly better than their half year results. This shows that in this challenging operating environment for the banking sector, CommBank is the standout.

What is the market reaction to CommBank’s FY20 report?

The market reaction to CommBank’s result is positive. CommBank is up marginally today and is currently trading at A$74.71. The reason why this reaction is positive is because the Australian market is down 0.3% today. CommBank is trading at a forward P/E ratio in the high-teens and has an annual dividend yield of around 4.7%.


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

 

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