Commonwealth Bank of Australia (ASX: CBA) is Australia's leading providers of integrated financial services, providing retail, business and institutional banking, funds management, superannuation, life insurance, general insurance, broking services and finance company activities. Their operations are conducted primarily in Australia and New Zealand. Commbank has a market capitalisation of around A$191 billion.
What are the key features of CBA’s FY21 results?
Commbank’s cash NPAT for FY21 of $8,653m was 19.8% higher on FY20 due to an improvement in economic conditions and outlook resulting in a lower loan impairment expense and a strong contribution from volume growth in all core markets. Earnings per share (cash basis) for FY21 was $4.88, also up 19.8% on the previous year.
Some key highlights from Commbank’s FY21 results include the following. First, Commbank’s net interest margin (NIM) was down 4 basis points due to higher liquid assets, with the impact of the low-rate environment largely offset by management actions, lower wholesale funding costs and favourable funding mix. The fall in Commbank’s NIM has a negative impact on Commbank’s earnings.
Second, on the positive side, volume growth in Commbank’s key businesses is impressive. In particular, Commbank’s business lending increased 3 times the rate of growth of the entire banking industry, while home lending increased 1.2 times the rate of growth of the entire banking system. This means that Commbank is capturing market share from its key competitors (ie, the other major banks).
Third, also on the positive side, Commbank’s loan impairment expense decreased by 78% in FY21 reflecting an improvement in economic conditions and outlook. Together, with strong growth in lending, this reduction is the key factor driving Commbank’s 19.8% increase in earnings in FY21. Commbank maintains a strong provision coverage ratio of 1.63%, reflecting the economic uncertainty from the continuing impacts of COVID-19.
Fourth, Commbank’s Common Equity Tier 1 (CET1) capital ratio was 13.1% at 30 June 2021 and is well above APRA’s ‘unquestionably strong’ benchmark of 10.5%. During the year, the Commbank’s CET1 capital was supported by profits generated in the ordinary course of business (organic capital) as business fundamentals remained strong and the benefits of proceeds received from the sales of non-cores businesses. Commbank’s very strong capital position provides the basis to return surplus capital to shareholders.
What is Commbank returning to shareholders?
Commbank is returning surplus capital to shareholders in two ways. First, Commbank will pay a final dividend of $2.00 per share (fully franked), up from $0.98 for FY20. This takes the full year dividend to $3.50. The final dividend payout ratio is 71% of cash earnings. Commbank will target a full year payout ratio of 70-80% of cash NPAT.
Second, Commbank today announced its intention to conduct an off-market buy-back of up to $6 billion of CBA shares. Buy-back will be conducted by way of an off-market tender process which will open on Monday, 30 August 2021 and close on Friday, 1 October 2021. The buy-back price will comprise a capital component of $21.66 per share, with the remainder of the buy-back price deemed to be a fully franked dividend. The high dividend component (approximately $70 per share) is particularly attractive to superannuation funds in the pension phase. The final pricing will be determined through a tender process. Commbank expects that the utilisation of franking credits in the buy-back will not adversely impact on its ability to pay fully frank dividends in future years.
What is the outlook for the CBA?
Commbank did not provide any specific guidance for FY22 earnings as the COVID 19 pandemic continues to have a negative impact on the Australian economy. Commbank noted that the ongoing roll-out of the vaccination program and government support packages will be important to help Australians and the economy on the path back towards full economic activity.
That said, Commbank expects, similar to FY21, that number of factors will negatively impact on NIM in FY22. This is a negative for earnings in FY22. These negative factors include the continuing low-rate environment, price competition across both lending and deposit products, unfavourable mix impacts of customers switching to fixed rate home loans and higher rate deposits and higher liquids. The pressures on Commbank’s NIM in FY22 will also impact on the NIM margin for all banks operating in the Australian market.
What is the market reaction to CBA’s FY21?
The market reacted positively to Commbank’s FY21 results and the announcement of an off-market buy back. The price of Commbank shares increased by around 1.5% to $108.00. Commbank trades on forward PE ratio in the low twenties and a dividend yield of around 3.5% (fully franked).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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