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CBA

Commonwealth Bank of Australia Sound result in troubling economic 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.

CommBank (ASX: CBA) is the largest bank and second largest publicly listed company in Australia. CommBank has a market capitalisation of A$106 billion.

 

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What are the key results from CommBank’s quarterly activities report?

Cash net profit after tax for Q3 FY20 is $1.3 billion. CommBank’s added $1.5 billion to its credit provision in the quarter for the potential impacts of COVID-19. As of 31 March 2020, the total credit provision is A$6.4 billion. CommBank’s loan impairment expenses for Q3 FY20 is $1.6 billion, inclusive of the additional COVID-19 provision.

CommBank has maintained a strong capital position with Common Equity Tier 1 (CET1) ratio of 10.7%. This was reduced from CommBank’s CET1 ratio of 11.7% at the end of 31 December 2019. This is still above APRA’s ‘unquestionably strong’ ratio of 10.5% and well above the minimum a ratio of 8%. CommBank’s net interest margin was lower than 1H20 due to reduced earnings on capital and deposits from the falling interest rate environment.

CommBank also announced that it has entered into an agreement to sell the 55% interest in Colonial First State (CFS) to KKR (a global investment firm). The transaction implies a total valuation for CFS on a 100% basis of $3.3 billion, which will result in CommBank receiving cash proceeds of around $1.7 billion. This sale is expected to deliver an increase of approximately $1.4 billion - 1.9 billion of CET1 capital. This should move CommBank’s CET1 capital ratio around 30 – 40 basis points higher than APRA’s basis as at 31 March 2020.

CommBank’s business performed well despite the troubling environment. CommBank’s home lending, household deposits and business lending were all up 1.2x system, 1.6x system and 4.2% respectively. Home loan growth remained above system due to strong new business volumes in the quarter. However, as expected, weekly application volumes have trended lower in March, April and May relative to the peak volumes experienced in February, due to Government COVID-19 restrictions impacting open house and auction activity. Household deposits remained strong due to a reduction in consumer spending and an increase in savings from the Government stimulus payments. Finally, business lending growth was driven in large part by an increase in utilisation rates as businesses drew down on existing facilities for liquidity purposes in the current economic environment.


What is the outlook for CommBank?

In terms of the economic outlook, CommBank notes that GDP growth in 2020 calendar year is expected to be negative 6%, with a large turn around in 2021 with GDP growth of 6%. Unemployment in the 2020 calendar year is estimated between 8 – 10%, with unemployment remaining on average around 8% in 2021 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 addition, as shown from this result, CommBank’s business remains strong with growth through this troubling period.


What is the market reaction?

The market reaction to CommBank’s report is positive. CBA is up around 0.3% and is currently trading at A$59.90. This is a good reaction as the Australian market is down around 0.9%. CommBank’s forward P/E ratio is in the mid-teens.

 


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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