Cost Concerns | Commonwealth Bank of Australia (ASX:CBA) Recommendation

Ord Minnett Research Recommendation:   Commonwealth Bank of Australia (ASX: CBA)  

Commonwealth Bank reported an FY21 cash net profit of $8.653bn, in line with Ord Minnett’s forecast. The second-half figure of $4.785bn came in slightly below our estimate, with higher-than-expected remediation costs largely offsetting better impairment expenses.

On an underlying basis, revenue was in line and costs were 0.4% higher than our estimate, resulting in a pre-provision profit 0.8% below our forecast. Within revenue, net interest income was slightly softer, while non-interest income was stronger.

The standout feature of the result was a larger-than-expected final dividend of $2.00 a share, ahead of our $1.85 forecast, representing a higher full-year payout ratio of 75% (normalised for long-term credit costs). An off-market share buyback of $6bn was also announced, above of our expectation of $5bn.

CBA remains in an enviable position in the Australian banking market, with a #1 or #2 net promoter score in all of the key battlegrounds, a strong digital offering and IT platform, and an increasingly differentiated retail banking proposition. We believe these factors position the bank well to 1) fend off threats from financial technology companies, and 2) continue to take share from its major bank competitors.

With the stock is trading on an FY22E price to earnings multiple of about 20x, at a 40% premium to the other major banks, the market is paying handsomely for these qualities. A lack of cost control is somewhat of a concern, although given sound execution and a good track record on investment, it is hard to see what will drive a derating in the near term.

We have increased our cash EPS forecasts by 4% in FY22 and 1% in FY23 due to lower loan losses. However, our pre-provision profit forecasts have been cut by about 1%, with higher expenses more than offsetting increased revenue. We have also factored in a further $4bn of buybacks. We maintain our Hold recommendation, while our target price has lifted to $95.00 from $92.00.