Australian banks are in the process of writing back many of their COVID-19 provisions. That said, there are still some large weeping sores for bank earnings. High touch service sectors are demolished. Commerical property is stuffed by work from home. Both of these trigger pockets of residential stress even as the Frydenberg Unstimulus lands on everybody. The excellent Jonathon Mott takes a look at whether CBA is a positive leading indicator or canary in the coal mine:
1H21 Result – Cash NPAT $3,886m, EPS $2.20 (+32%), Div $1.50, ROE 10.5%
CBA delivered a clean 1H21 Result, about 2% above consensus. The highlight remains its Balance Sheet strength, with further provision and capital build maintaining a high degree of conservatism. Highlights (H/H): (1) NII up 1%, with NIM down just 3bp to 2.01% and 1.1% growth in Average loans; (2) Non-Interest Income was stronger, +5% with stronger fees, commissions & trading; (3) Underlying costs rose 2%; (4) Underlying PPOP rose 2%; (5) Credit Impairments (BDD) 22bp; (6) CET1 12.6% (13% pro forma).
Strong revenue recovery in the December quarter. Is this sustainable?
CBA provided more detail on its key line items with its 1Q trading update in November. This allows us to back-solve its 2Q performance from today’s 1H result. This shows a sharp 4% revenue bounce in 2Q (q/q). The revenue recovery appears to be broad-based, with stronger lending volumes and a bounce in NIM driving a 2.4% recovery in 2Q Net Interest Income. Better trading income, a rebound in merchant fees post COVID and stronger CommSec revenue drove a 9% rise in 2Q fee income. We believe this highlights the underlying leverage the banks have to the economic recovery. While we are cautious to extrapolate a good quarter and it is impossible to escape the drag of near-zero rates, the revenue environment is better than previously envisaged.
Balance Sheet strength – Will excess capital and provisions be released?
With Total Provisions to CRWA at 1.81% (was 1.34% pre COVID) and a pro-forma CET1 of 13%, CBA’s Balance Sheet is in very good shape. CBA stated that in order to see its excess capital be released it needs to see: (1) greater domestic economic certainty; (2) ongoing improvement in credit quality and risk factors; (3) Prudential regulatory guidance. With the finalisation of Basel 3 expected mid-year, we now expect a $10bn buy-back (was $8bn) to be announced with its FY21E result. However, excess provisions are likely to be more slowly released over coming periods, with credit impairment charges likely to fall towards the low double-digit (bp) levels, in our view.
Valuation: Neutral. PT $90 (was $80). GGM based
EPS upgraded 2%/6%/10% (FY21E/22E/23E) given stronger lending growth, slightly better NIM, lower credit impairment charges and increased buy-backs, offset by ongoing tech investment. CBA is a premium banking franchise, with ROE expected to recover to ~12%. However, we believe this is reflected in its price at 2.2x book and 12.3x PPOP. We remain Neutral CBA, with the majority of the return expected via income distributions (4.5% dividend yield + 6.5% of market cap in buy-backs).
Given Mr Mott lifted his valuation from $80 to $90 today we’ll see it as glass half full from him.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
