This story introduces the COMMONWEALTH BANK OF AUSTRALIA and other companies. For more information SHARE ANALYSIS: CBA
Weak earnings growth and sluggish outlook belied a $ 6 billion buyout and reinstated payment, and few were impressed with the Commonwealth Bank’s FY21 results
-More headwinds to base the activity from lower prices than its peers
– A further slowdown in the interest margin on the mortgage portfolio is expected during FY22
-Investment expenses targeting investment banking
By Eva Brocklehurst
There was something for everyone in the Commonwealth Bank ((CBA)) FY21 results, but for most brokers this is an expensive stock that does not justify its multiples of negotiation.
Despite some promising trends, Macquarie has been disappointed with weak earnings growth and believes the competitive environment is intensifying, as the bank’s base faces more declining official rates relative to its peers.
Pre-supply profits are expected to increase by 1-2% per year over the next two years, but this rate will likely be lower than their peers, and this type of growth rate does not justify the current multiple of PE, from the broker’s perspective. While balance sheet trends remain favorable, income dynamics are weak.
Bell Potter is the exception. Net cash income of $ 8.65 billion rose 20% and the broker found more positives than negatives, highlighting net interest income, asset quality, capital and liquidity all by upgrading the rating to Buy from Hold with a target of $ 118.
Bell Potter, who is not one of the seven brokers monitored daily on the FNArena database, also suggests the pandemic has been good for CBA, which should be able to withstand other issues related to the pandemic, becoming fundamentally stronger when interest rates start to rise again.
It is important to note that the broker includes the impact on the value of a higher CET1 capital surplus and notes that the level 2 CET1 ratio has increased to 13.1% since the end of the first half, boosted by a strong generation of organic capital. This is ahead of APRA’s “unmistakably strong” requirement of 10.5% and further impetus from disposals should be forthcoming to reach a leading sector of 13.49 to 13.59%.
Morgan Stanley is on the other side, believing that CBA can be a first class company, but expectations are high and financial metrics do not justify a multiple of PE FY22 of more than 20x.
The broker cautiously assumes a CET1 ratio is kept above 11% and expects another $ 2.5 billion buyback in FY 23, calculating that total buybacks of $ 8.5 billion would reduce the number of shares of about -5% over the next two years.
The CBA reiterated its goal of an annual payout ratio of 70-80% and intends to maintain a significant balance of excess postage credits, also announcing a $ 6 billion buyback with the results.
Citi highlights restored dividend payout ratio and write-backs, which were made possible by low rates and excess liquidity, but says excess liquidity will also have a negative effect on the bank’s ability to generate income.
FY21 revenue was flattered by a one-time recovery of $ 300 million, meaning strong volume growth did not deliver the expected revenue result. Management highlighted a further decline in the FY22 mortgage front book interest margin, as well as a lack of demand for institutional loans and weak trading conditions.
Adjusted for depreciation related to aircraft leasing and a favorable contribution from depreciation, underlying revenue growth was only 0.4%, Macquarie points out. Therefore, the stock is considered expensive.
Credit Suisse was also not impressed, as overall growth and investment in technology were not reflected in bottom line during FY21. Considering the $ 6 billion buyout, the broker sees little relative upside as a stock is trading at 21x PE and goes underperform.
The CBA does not provide any guidance on costs, nor has it made a commitment to reduce absolute costs over the medium term, although Morgans points out that the bank has the best underlying cost-to-income (jawbone) ratio of the majors.
This means the bank has a limited margin for improvement in costs and the broker is evaluating its peers, in particular Westpac Bank ((WBC)), will close the profitability gap over the next three years.
In FY22, Citi only expects revenue growth of 1% and also notes that cost growth remains stubborn. With quantifiable and valued excess capital, the accounting multiple appears at odds with more gloomy underlying outlook and the broker concludes that a demotion from Neutral to Sell is in order.
Morgan Stanley believes the cost approach has changed, with the goal of reaching positive jaws, but not specifically moving towards that during FY22, rather than reducing the absolute cost base.
The collective allowance reversal of $ 632 million in the second half was higher than Morgan Stanley’s expectations, but hedging is still considered healthy, at around 1.4% of credit risk-weighted assets.
Management has indicated that the trade stress is fairly moderate, but the broker expects underlying loss rates to rise to around -23 basis points in the first half of FY22, compared to -8 basis points in the second half of the EX21, before normalizing.
The CBA increased its capital spending to $ 1.8 billion, up 26%, and Macquarie suggests, with $ 1.5 billion currently captured in the income statement, if management wishes to maintain that level, ongoing spending is likely. Therefore, execution will be the key.
The bank is high quality but overpriced, agrees Morgans, although the results indicate the CBA is serious about building a top investment bank in Australia, which is part of the reason for the capital spending high.
The broker says the bank can successfully meet the challenge of its peers in this area, in particular the National Australia Bank ((NAB)), noting an increase in the business lending market share and the market share of deposits to companies in the results. Nonetheless, as merchant banking grows, Morgans suspects that the overall profile of the loan portfolio will increase the risk curve.
Some interesting numbers, according to Macquarie, to indicate that around 9% of clients are on hardship assistance and that interest-only loans as a percentage of total home loan balances have fallen to 12%, from 16% in FY20 and 22% in FY19.
Home loans over 90 days past due have increased and the bank expects this to continue in the near term, particularly in areas affected by the recent Sydney lockdowns, while a rebound in lockdown challenges is expected at the end of 2021. Despite a slight increase home loan arrears, Macquarie notes that consumer credit arrears continue to improve.
Management also signaled that New Zealand’s economy is in a strong position and the Reserve Bank of New Zealand is expected to raise interest rates.
The FNArena database has five sell ratings and one keep rating (Ord Minnett). The consensus target is $ 90.50, suggesting a decline of -15.4% from the last share price. The dividend yield on forecast FY22 and FY23 is 3.7% and 3.9%, respectively.
Find out why FNArena subscribers love the service so much: “Your comments (thank you)” – Warning, this story contains some unabashedly positive comments about the service provided.
FNArena is proud of its track record and past accomplishments: ten years later
Click to view our glossary of financial terms