Is CBA really worth it?

Deutsche Bank has a very good take on CBA today (and a Hold rating):

Defensive qualities on show but PE rel vs peers very elevated

CBA’s 1H16 result was somewhat of a mixed bag. While its net interest margin disappointed due to weakness in Insto & NZ, cost growth was stubbornly high and impairment expense increased, this was offset by better than expected loan growth and non-interest income which delivered a result in line with the market. In the current environment, an in-line result should be seen as a creditable outcome. That said the outlook for both margins and costs does look testing, reflected in our earnings downgrades, and with CBA already trading at a 35% premium to the major bank peers (vs 5yr avg of 15%), we think the market is already fully valuing CBA’s defensive qualities. Retain HOLD.

Capture

Margin outlook challenging but growth has made up for this

CBA’s 1H16 margin disappointed (flat hoh vs DBf of +2bps), with mortgage repricing benefits evaporating. This largely reflected ongoing Insto pressures, which are likely to be replicated by other banks (particularly ANZ which is overweight Insto). The retail margin expanded, with repricing benefits largely sticking. While headline NIM looked soft, strength in Aus & NZ lending made up for this. The NIM outlook is fluid at present, however if conditions remain as they are funding pressures are likely to impact margins in the ST. However CBA has flexibility given it is pre-funded on its wholesale funding program, and prolonged funding cost pressure is likely to see further asset repricing.

Higher bad debts but still healthy conditions ex mining/oil & gas

CBA’s impairment expense rose more than we were expecting, but at 17bps of GLA the charge remains near cyclical lows. While impaired assets in the mining/oil & gas book rose from 0.8% to 1.9% of mining/oil & gas exposures, the $350m of impaired assets is small in the scheme of group GLA and conditions outside the mining sector continued to improve for CBA.

That premium is monstrous. CBA has the biggest exposure to WA of any bank, which is ground zero if the bust really gets going.

CBA has a certain protective gloss about because it was once government owned and as such is a little less exposed to wholesale debt because deposit funding is higher. Nonetheless, if Megabank comes under real stress, where one goes all will follow.

It looks like the last redoubt of the yield desperate to me.

Comments

    • Diogenes the Cynic

      Brave! I went with a Dec expiry as I wasn’t sure if the punters would catch on by June. Luck!

      • june 2018 for me on CBA, ANZ. will pick up some WBC soon. both CBA and ANZ in the money. i reckon i will make a killing. this is gonna get so nasty

  1. I think the protective gloss will prove illusionary for equity holders. When Megabank reaches out to the tax payers for a bail-out (like it did in ’91) we will see that we are already underwriting our own deposits up to $250k per account and I suspect that the RBA instead of buying Megabuck’s distressed shares will move the mortgages that have not been sold, as part of the covered bond pool, onto its books.

  2. The yield desperate need to imagine that in CBA they are really buying a bond set to mature in the next couple of years with a face value of about $50. While that franked coupon may look terrific next to a CBA term deposit rate, the yield to maturity is a little less compelling when you’re buying it at $75.

    • Agree with the analogy. I came up with a future/target price of around $48 – $50 for the CBA based on looking at a long term monthly price chart. Likely time frame in my mind is around 24 – 36 months. Of course there will be a lot of price movement – both up and down along the way

  3. It hit $27 during the last crash.

    IF everything’s unfolding for real this time, when they report their first bad quarter, I wouldn’t be surprised if it hit the teens 6 months later.

    • During the last crash Macquarie was a good leading indicator for the big 4 on the way down, albeit with a lot of talk that it was going to follow B & B onto the deck (which I – amongst many – would not have shed tears about), I think that once again where it goes, others will follow.

  4. The CBA logo holds the key. The yellow bit represents “cartel-based mortgage hysteria” value. The black bit is real value.

  5. CBA a good representation of the housing market. When interest rates drop to zero the CBA share price will join property prices on the way to infinite.

    • The bail outs start much earlier than that as banks use lender of last resort facilities of the RBA and do sales of securities to reduce assets and get liquidity. If the RBA is buying the securities there is a real chance it is a disguised equity gift to shareholders if the securities bought turn out to be of less value than the RBA pays for them. The bailout could also involve use of the government guarantee again at a nominal fee rather than at the highest price the banks will pay for it. The government should auction guarantees of bank bonds as Credit default swaps to the market and let the worried borrowers pay the premium. After all, mobile spectrum is auctioned, why not the government guarantee. The bank bond holders, long term creditors (other than the retail deposit base with the benefit of the implicit guarantee) ought have to accept government yield if they want government security.