Costly Business

Ord Minnett Research Insight: CBA

Commonwealth Bank reported September-quarter cash earnings of $1.8bn, well below the run-rate required to reach Ord Minnett’s previous (above-consensus) forecast for first-half FY21.

Net interest income (NII) and revenue were flat on the second-half FY20 quarterly average, despite very strong home loan growth running at more than twice system credit growth, highlighting the pressure on net interest margins (NIM) in a low interest rate environment. Underlying expense growth of 2% on the quarterly average of second-half FY20 was higher than our flat assumption for first-half FY21, while asset quality trends were benign.

Capital was stronger than expected, but CBA did not appear to take any credit risk migration impacts, which we think are still likely in the December quarter.

CBA has taken full advantage of its distracted peers over the past six months but we make the following observations: 

1. we expect its peers to redouble their efforts to regain lost market share; 
2. the mix of CBA’s loan book points to ongoing NIM pressures from mortgage competition; and 
3. its costs are still moving in the wrong direction.

The bank is trading on a stretched valuation that, in our view, fails to reflect the challenging top-line environment driven by its heavy exposure to retail banking, and its performance on costs is not sufficient to compensate for this. CBA remains strongly capitalised versus its peers, however, and this latest result only reinforces this position.

We have reduced our cash earnings forecasts for CBA by 4.6% in FY21, 2.2% in FY22 and 2.4% in FY23, based on our expectation of lower NII and slightly higher costs, offset partly by lower loan loss charges.

CBA may be defensively positioned from a capital and provisioning standpoint, but investors are being asked to pay a very large insurance premium for these qualities. On balance, we maintain our Hold recommendation, but CBA is our least-preferred bank among the big four. Our target price has fallen to $65.80 from $66.30.