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Ord Minnett Research Insight: Commonwealth Bank of Australian (CBA)

The first-half FY21 result from Commonwealth Bank came in very close to Ord Minnett’s estimates across revenue, costs and loan losses, and the interim dividend matched our expectation. Excluding the higher day count in the half and volatile items, revenue looked to be flat half-on-half (HoH) despite growing well above system in mortgages and business lending.

The real surprise, however, was the much stronger capital position, with a pro-forma common equity tier-one ratio of 13% being 50 basis points (bp) ahead of our forecast. CBA now expects no deterioration in capital ratios from credit risk migration under its base-case scenario.

The main area of disappointment was costs, and we note that since CBA announced its absolute cost reduction target in 1H19, operating expenses have risen in every half. We are reticent to criticise the focus on long-term investment, but increases in our expense forecasts have partly offset our upgrades to revenue.

Net interest margins (NIM) remain difficult to predict in the near term. CBA’s NIM was slightly better than expected, down 4bp HoH excluding markets versus our forecast of a contraction of 5bp. Excluding day-count impact and volatile items, we estimate revenue was flat HoH despite the strong balance sheet growth. Looking ahead, we assume NIM will fall 3bp HoH in 2H21.

We have raised our net profit forecasts by 5% in FY21, 4% in FY22 and 1% in FY23. This is due mostly to lower loan loss forecasts in FY21 and FY22, with pre-provision forecasts up 2% in FY21, and 1% in FY22 and FY23. Revenue upgrades via higher loan growth more than offset our higher costs estimates. Our dividend forecasts have also increased and we now allow for $9bn of share buybacks.

CBA has a very large capital surplus, but its valuation remains stretched at around 18x FY23E earnings. This has led us to maintain our Hold recommendation, although our target price has lifted marginally to $79.00 from $78.60.