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Date : 21/02/2022

Commonwealth Bank of Australia

ASX :

CBA

Market Cap : $166.64 Billion

Dividend Per Share : $3.75

Dividend Yield : 3.82 %

Hold

52 Week Range : $81.56 - $110.19

Share Price : $98.09

Interim results have beaten market expectations. Interest rate hikes to boost profits in near-term. We recommend a "Hold"

Company Analysis

CommBank beat market expectations in its half-year results. CBA has focused on end-to-end customer service and operational discipline in a low-rate environment. This has enabled them to grow their business effectively and take further market share from their competitors. There has been above-market growth in home lending, business lending and deposits during the half-year period. The strong volume growth supported operating income and offset the impact of home loan competition and switching.

The highlights from the announcement were:

  • Statutory net profit up 26% to $4.74 billion.
  • Cash net profit rose 23% to $4.75 billion.
  • Operating income grew 2% to $12.2 billion.
  • Operating expenses were flat at $5.59 billion.
  • Loan impairment expense improved $957 million to a $75 million benefit.
  • Net interest margin (NIM) was 1.92%, down 14 bps.
  • Interim dividend increased by 17% to $1.75 per share.

The higher cash profits resulted from continued volume growth across the business in home lending, business lending and deposits, flat operating costs and significantly lower loan impairment expense due to the improving economic outlook.

CBA continued to invest in operational execution and the ongoing strengthening of its business, consistent with CommBank’s strategic priorities.

Loan impairment expense decreased due to lower collective provisions reflecting an improvement in the economic outlook and higher collective provision charges in the prior comparative period from the impact of COVID-19. Arrears on home loans and consumer finance remain low.

Home loan arrears were reduced primarily due to low-interest rates, improvement in economic conditions, a strong property market and customer origination quality. Credit card and personal loan arrears remain low due to improved economic conditions and customer origination quality.

The Net Interest Margin declined due to increased lower yielding on liquid assets and due to the switching to fixed-rate home loans as competition in the loans market heated up.

A highlight of the result is CBA’s continued capital and balance sheet strength. The disciplined and balanced approach to capital optimises growth, reinvestment and shareholder returns. This has allowed CBA to return excess capital to our shareholders and lower their share count while remaining strongly capitalised and provisioned.

CommBank retains the flexibility to provide further growth. The Bank will continue to target a full year payout ratio of 70-80% of cash NPAT and an interim payout ratio of ~70% of cash NPAT. An interim dividend of $1.75 per share, fully franked, has been announced.

Capital management in 2021 included a $6 billion off-market share buy-back. CBA now intends to undertake further capital management via an on-market buy-back of up to $2 billion.

CBA expects to commence the buy-back after completing the on-market share purchase. The buy-back is expected to reduce the CET1 capital ratio by approximately 42 basis points. Post the buy-back, CBA will remain well placed to accommodate changes under APRA’s new capital framework effective 1 January 23.

Outlook

Like almost everybody that has been keeping tabs on the Australian economy, CommBank expects it to have a stellar year in 2022 and completely emerge from the roots of the pandemic that have been weighing it down. That being said, we as investors are now used to not receiving guidance from companies, and again, this has continued. While CBA did not provide guidance, it did reaffirm that they will be paying out 70%-80% of NPAT as full year dividends.

The unemployment and underemployment rates are at the lowest since 2008, with high participation rates. Australian households have accumulated savings, and stronger wage growth is expected. An increase in demand for goods relative to services, supply-chain constraints and tightening labour markets will likely lead to a further increase in the inflation rate.

While the inflationary risk does not currently appear as high in Australia relative to global peer nations, the RBA has announced the end of quantitative easing in February. The CBA Economics team’s forecast is for a modest monetary policy tightening cycle through FY23, with the first official interest rate increase forecast for August 2022.

Any rate hike should also increase the profitability of CBA in the short-to-medium term – thereby supporting dividend growth.

Our detailed earlier report can be accessed by clicking here.

The Verdict

CommBank, the biggest bank in Australia, has had a fantastic start to FY22 as they beat market expectations. As the economy rebounds, continued volume growth and lower loan impairment expenses have resulted in CBA’s profits soaring. Hence, a bumper dividend has been announced, and CommBank is also keeping its share buy-back going with an additional $2 billion.

With inflation running in overdrive, the eventual interest rate hike should allow CommBank to book higher profits in short to medium term – leading to higher dividends as the bank reaffirmed their 70%-80% payout for the full year. We recommend a “Hold” to reap the rewards of healthy dividends and share buy-backs.

 

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