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Commonwealth Bank of Australia HY20 Report - Solid Result In A Tough Operating Environment

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

Commonwealth bank of Australia (ASX: CBA) is the largest bank and publicly listed company in Australia. CommBank has a market capitalisation of A$149 billion.

CBA

 

What are the key results from CommBank’s HY20 report?

  • Statutory net profit after tax (NPAT) for HY20 is A$6,616 million, up 34% (including A$1,688 million from the gain on sale of Colonial First State Global Asset Management (CFSGAM)) compared with the corresponding period.
  • Cash NPAT for HY20 is A$4,477 million, down 4.3% compared with the corresponding period.
  • Operating income for HY20 is A$12,416 million, in line with HY19.
  • Operating expenses for HY20 is A$5,429 million, up 2.6% compared with the previous quarter.
  • Group net interest rate margin (NIM) for HY20 is 2.11%, up 1 basis point HY19.
  • Interim dividend per share of A$2.00.

 

What are the drivers of this result?

CommBank’s cash NPAT is down due to operating expenses being up 2.6% while operating income remains flat for HY20. Although CommBank’s NIM was slightly up by 1 basis point, this did not offset the rise in operating expenses. Operating expenses are up due to wage inflation and higher IT, risk and compliance costs.

A positive point from the announcement was that CommBank’s home lending business increased by 4% in HY20 compared with HY19. In addition, this compares with growth of total home lending for the Australian economy of approximately 1.5%. That is, CommBank increased market share in the home lending business.

 

What is the outlook for CommBank?

In terms of the outlook, CommBank notes that the fundamentals of the Australian economy remain positive. CommBank is taking measures to reduce costs through business simplification. CommBank’s capital positive is strong (well above APRA’s requirements) and credit quality remains sound.

However, CommBank’s management notes:

the lower cash rate will continue to impact NIM as the benefits of the equity and deposit hedges run off. We expect that previously announced cash rate reductions will negatively impact Group NIM by 5bpts in 2H20 (vs1H20), 4 bpts in FY20 (vsFY19), and by another 4bpts in FY21 (vsFY20).

The major banks such as Australia and New Zealand Banking Group (ASX: ANZ), National Australian Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) are facing significant headwinds of slow credit growth (also reflecting weak economic growth as shown from the national accounts in the June and September 2019 quarters), pressures on net interest margins (which could lower profitability) and increased regulatory requirements (both capital and lending requirements). That is, in the short term at least, the major banks may have lower growth prospects than other sectors of the market.

 

What is the market reaction to CommBank’s HY20 results?

The initial market reaction to CommBank’s HY20 results is positive. CommBank is up 2% and is currently trading at A$86.46. CommBank has a forward P/E in the mid-teens and an annual dividend yield of around 5%.


 

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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