Australia | 10:30 AM
A full suite of broker Sell ratings could not prevent CommBank posting its largest one-day share price gain in six years on the release of first half numbers.
- CommBank posts consensus-beating first half result
- Growth in deposits and loans outstanding
- Earnings forecasts rapidly upgraded
- Brokers are unmoved on “overvaluation” calls
By Greg Peel
What is it about Commonwealth Bank ((CBA))?
For as long as anyone can remember, bank analysts have held firm on Sell ratings for the stock, citing excessive valuation relative to the sector and the market.
Valuation remained elevated heading into this February result season, prompting analysts to suggest CBA’s result would need to be stellar to even justify its premium, let alone to prompt any re-rating.
It was.
Stunned analysts watched as CBA’s share price jumped 6.8% on the day of release -- delivering the nation’s largest lender its largest one-day share price gain in almost six years.
As Morgans has long noted, as well as being Australia’s largest bank, compared to its peers CBA has the highest return on equity, lowest cost of capital, leading technology, largest position in the residential mortgage market (with the lowest risk portfolio in this low risk market segment) and largest low cost deposit base (with a greater skew to households and transaction accounts than its peers), plus a loyal retail investor and customer base.
Throw in CBA being, due to its capitalisation, a must-have in every index-tracking fund, supported by ongoing super net inflows which fund managers have no choice but to allocate proportionately to CBA, and Australia’s AA-rated banks seen as safe havens for foreign investors, and there is enough to support a premium.
We should also note the positive feedback loop effect: the higher CBA’s share price rises relative to the market, the greater its index weighting, necessitating further fund manager allocation, causing the share price to rise further…
Yet, still analysts cannot justify the extent of premium.
The Result
CBA delivered a solid first half result, with cash earnings 5% ahead of consensus underpinned by better underlying margins and lower bad & doubtful debts (BDDs).
The strength of CBA's deposit franchise was a key highlight, Macquarie suggests, particularly in the face of increased deposit competition across the sector.
Two things stood out for UBS. The first was the growth in transactional deposits, especially in retail banking (11.6%), widening CBA's moat in the retail market, supporting group net interest margin (NIM) and growth in net interest income (NII).
Morgans notes net interest income growth (5% versus expectations of 2%) was driven by the “strongest half since 2008” of domestic volume growth and mild decline in underlying NIM.
The second standout for UBS is that CBA's mortgage business is in full swing with record value of new business written in the half. New mortgages funded during first half increased 24% half-on-half, reaching $105bn.
This stronger-than-anticipated lending growth is expected to support cash profit growth in a stable asset quality and credit environment despite a fluid competitive backdrop, UBS notes.
Deposit growth was also impressive, rising 12% half on half in the retail base and 7% in the business segment, despite, as Jarden points out, paying well below market rates on deposits while charging market rates for loans.
Ord Minnett notes CBA has recovered to a 33.5% market share after some weakness over the past year. The customer mix has changed, however, with the somewhat surprising outcome of increased share of the 25–35 age group but a loss of market share among the 50–64 demographic.
Ord Minnett suspects the difference is more first-home buyers in the former demographic, and fewer investors and savers in the latter.
Cost growth was driven by wage and IT vendor cost inflation, Morgans notes, with tech investment effectively self-funded by productivity savings.
There was discussion in the market briefing about the opportunity arising from CBA’s investment in artificial intelligence. Morgans’ sense is that the size and timing of AI benefits are evolving and uncertain, and that the prize could be meaningful, but there is a risk the gains are offset by the pricing power of key IT vendors.
Competition
Deposit competition has been a strong debate in the sector. However, Citi notes there was nil drag from funding costs in this first half while portfolio mix was positive as deposits grew faster than loans.
While the sector has been debating Macquarie Group’s ((MQG)) impact on competition (Australia’s largest investment bank having moved into the commercial banking space), Citi thinks this result highlights the structural shift in the industry which is seeing market share gains to the majors and Macquarie more broadly.
A positive outlook for CBA, but Citi thinks this is shared by the sector.
Jarden points out CBA’s below-market deposit rates principally drive the bank’s NIM advantage and valuation premium. However, Jarden now finds this a precarious economic model vulnerable to disruption in a time when IT advancement has removed any proprietary distribution advantage that historically justified vast below market payment on deposits.
Macquarie clearly sees this, the broker suggests, and is positioned to compete with a compelling offering that's still in the early stages.
Even Macquarie’s analysts suggest deposit competition is likely to remain a threat, without naming any names.
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