Capital Disappoints | Commonwealth Bank (ASX:CBA) Share Recommendation

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

Commonwealth Bank provided a third-quarter FY22 trading update that threw up few surprises, with the bank posting a $2.4bn cash net profit for the quarter. Revenue was largely on track with our second-half forecast of net interest margin (NIM) falling 4 basis points (bp) excluding markets income and liquidity, versus our previous estimate of a 6bp decline for the second half.

Cost performance appeared strong, although this was driven by one-off factors such as a lower day count and the utilisation of leave balances, with staff numbers continuing to grow in the quarter.

The update on capital was disappointing, however, with the common equity tier-one ratio coming in at 11.1% due to 44bp of headwinds from interest-rate risk in the banking book and market risk. We expect this to grow further in the second half, to 11.5%. In our view, the buyback is likely to remain on hold until a larger capital buffer is established, likely post the sale of Bank of Hangzhou.

We now assume CBA will hold NIM flat in the fourth quarter at negative 4bp, although we have reduced our second-half loan growth estimate. Fixed-rate flow pressures have eased significantly, yet mortgage competition remains intense and Reserve Bank of Australia interest rate increases are likely to be only a slight tailwind this half, with a stronger contribution expected in FY23.

We have left our pre-provision profit forecasts unchanged for FY22, but raised them 4% in FY23 and 2% in FY24, with higher NIM offset partly by lower credit growth and higher costs. Our cash net profit forecasts have increased 1%, 4% and 2%, respectively, having allowed for lower impairment expenses in FY22 and FY23 but a higher normalised charge in FY24.

There was nothing in the update to shift our view on CBA. We maintain our Hold recommendation, while our target price has reduced to $93.00 from $94.60.