Company Overview: Commonwealth Bank of Australia is a provider of financial services, including retail, business and institutional banking, funds management, superannuation, general insurance, broking services and finance company activities. The Company's segments include Retail Banking Services, which provides home loan, consumer finance and retail deposit products; Business and Private Banking, which provides banking services to relationship managed business and agribusiness customers; Institutional Banking and Markets, which services its corporate, institutional and government clients; Wealth Management segment, which includes global asset management, platform administration, and general insurance businesses; New Zealand, which includes the banking and funds management businesses operating in New Zealand; Bankwest, which offers a range of deposit products, and IFS and Other Divisions, which includes the Asian retail and business banking operations.


CBA Details

Commonwealth Bank through its branches across Australia, New Zealand, North America and Europe covers a wide network, and the Bank caters to one’s financial needs at a global level. The Bank also provides migrant banking services to people moving to Australia. Further, the Bank has its own New Zealand banking licence and operates in the Corporate and Institutional market in New Zealand. The Bank is committed to fulfilling its corporate and legal health and safety responsibilities by implementing and maintaining policies, procedures and practices to provide a healthy and safe place of work for its people, visitors, contractors and customers. The Group has extensive initiatives and policies in place to meet its commitment to being Australia’s most accessible bank. CBA was the first Australian bank to remove ATM withdrawal fees for all CommBank and non-CommBank customers. The economic environment has given it the opportunity to continue to strengthen its balance sheet. The Bank recently completed the sale of its life insurance business in New Zealand (“Sovereign”) to AIA Group Limited (“AIA”) and represented a significant milestone for the transaction, and a key step in CBA’s strategy to create a simpler, better bank focussed on its core banking franchise in Australia and New Zealand.


Dividend Performance (Source: Company Reports)

Key Updates on Banking sector challenges and business model -

1. CBA filed a response to the civil proceedings which were commenced by AUSTRAC relating to Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF) in which CBA behaved in a defensive manner and regretted to fail to comply with AML/CTF obligations. CBA recently received one more amended statement of claims from AUSTRAC which increased the total number of alleged contraventions from approximately 53,700 to 53,800 and in respect of this CBA will also file an amended defence. Then,Royal Commission is also said to have earlier dismissed claims that CBA aimed to systematically default loans following its purchase of BankWest a decade ago; however, some breaches were unveiled over time.

2. The Group recently entered into an Enforceable Undertaking (EU) with the Australian Securities and Investments Commission (ASIC) regarding ASIC’s concerns that a small number of customers may potentially have received personal advice in the sale of Essential Super in branch and now CBA has paused all new account openings and will undertake a review of how Essential Super is offered and develop a revised conversation framework.

3. The Group has recently informed the market that it will demerge its wealth management and mortgage broking businesses. As a result of this, both group i.e., Colonial First State (CFS) and CBA will be focussed on their core businesses and market-leading positions, which will support to unlock value for both groups for their respective shareholders.

4. The Group made few management changes that included six appointments and made some changes to the Executive Leadership Team (ELT), including simplifying the Bank’s structure.
 

International Peer Basel III CET1-upto 1 February 2018 (Source: Company Reports)

Growth Prospects - The Banking Group announced a fully franked interim dividend of $2.00 per share on 7 February 2018, a 1 cent increase on the 2017 interim dividend. This represents a dividend pay-out ratio of 72 per cent of cash NPAT. The Group has been able to increase its dividend, even whilst providing for any kind of costs, and strengthening all aspects of its balance sheet so that it can support customers and deliver returns for its shareholders into the future. CBA’s continuous innovation through Tyme has led to the development of TymeCoach, a financial wellbeing platform for customers in South Africa and now this Tyme technology is also being transferred to ASB in New Zealand, with the deployment of 130 digital kiosks.


Dividend and ROE Performance (Source: Company Reports)

In fact, the Group is now close to APRA’s ‘unquestionably strong’ benchmark, in advance of the 1 January 2020 deadline, and this is without factoring in the impact of asset sales. The Group has been taking many initiatives and one of the initiatives has been Home Buying, which is driving transformational change in the proprietary channel, improving its end to end process and significantly improving loan quality and origination efficiency and this has helped in increasing new lending through the proprietary channel from 57 per cent to 64 per cent in the last 12 months.


Trend of Consumer Arrears (Source: Company Reports)

Financial Performance for 1HFY18 - The Group had considered a significant provision for regulatory and compliance costs, consistent with accounting standards and had taken a $375 million expense provision which it believed to be a reliable estimate of the civil penalty which a Court may impose in the AUSTRAC proceedings. The group however was asked to pay civil penalty of $700 million with AUSTRAC’s legal proceedings’ cost of $2.5 million. This was approved by Federal Court in June 2018; meanwhile the proceedings stood dismissed. The underlying operating income increased 4.9 per cent for 1HFY18 mainly due to net interest income which was up 6.2 per cent and it reflected continuing volume and margin management, with lending volumes up 3.5 per cent and the Group’s net interest margin up 6 basis points to 2.16 per cent. The underlying cost-to-income ratio reduced a further 10 basis points to 40.8 per cent but underlying operating expenses increased by 4.7 per cent to $5,318 million, driven by a $200 million expense provision for expected regulatory, compliance and remediation program costs.

Overall Financial Performance (Source: Company Reports)

For the December quarter, interest growth (only lending) comprised 21 per cent of total flows which was below APRA’s 30 per cent benchmark. Further, growth in the home loan portfolio was driven by a 7.5 per cent increase in owner-occupied loans and a 0.5 per cent increase in investment home loans. The Leverage Ratio was 5.4 per cent on an APRA basis and 6.1 per cent on an internationally comparable basis. The Group’s net profit after tax (“cash basis”) decreased 1.9 per cent on the prior comparative period to $4,735 million impacted by a $375 million expense provision for its current estimate of the civil penalty which a Court may impose in the AUSTRAC proceedings.

For the March quarter 2018, the group’s unaudited statutory net profit was of $2.30bn in the quarter while underlying operating expense increased by 3%, at the back of higher provisions for regulatory and compliance project spend. The credit quality however, has remained decent with respect to lending portfolios.


Credit Provisions (Source: Company Reports)

Outlook - The Credit quality remained sound and a focus on strengthening the balance sheet in the period led to stronger capital, funding and liquidity. Customer satisfaction ratings have remained high for the Bank and continued to be rated first or equally first in key segments. Net Promoter Score (NPS) is now the primary metric by which it assesses customer satisfaction and its goal is to be number one in NPS for all customer segments. The Banking Group’s new Ceba chatbot, driven by artificial intelligence, can help customers complete more than 200 banking tasks. For some time period, it was observed that personal loan, credit card and home loan arrears (excluding WA) remained low.


CET1 (Source: Company Reports)

On the other hand, CBA has made significant changes in strengthening its policies, processes and systems relating to an obligation under the AML/CTF Act through their Program of Action. They have also built a good digital banking ecosystem which resulted in 54 per cent of all the transactions processed digitally. The Group is planning to pursue an initial public offering of Colonial First State Global Asset Management (CFSGAM) on the Australian Securities Exchange (ASX) by the end of the calendar year 2018, subject to market conditions and necessary approvals.

Stock Performance - The Net Stable Funding Ratio improved and was 110 per cent (as on 31 December 2017), up from 107 per cent in June 2017, driven by increased long-term funding and extension of deposit terms. Moreover, CBA’s Common Equity Tier 1 capital ratio was 10.4 per cent on an APRA basis at 31 December 2017, up 30 basis points on 30 June 2017 and up 50 basis points on 31 December 2016. The Banking Group remains positive about Australia’s prospects, while being wary of the risks and will continue to focus on the long-term so that it can serve and innovate for its customers, provide stable returns for its shareholders, support the community, and remain strong into the future. It is expected that global growth trends will be positive overall and demand for Australia’s raw materials, and other goods and services, should remain strong but market volatility which remains a risk due to the interest rates environment and a threat from global trade war can undermine the confidence that is critical to continuing growth. Meanwhile, the stock has fallen 7.79 per cent in past six months and further down by 1.64 per cent in the past one week as on 13 July 2018after recovering by 9.78 per cent in last one month. The business still looks profitable and the stock is trading at low levels (13x estimated earnings). We give a “Buy” recommendation at the current market price of $74.24 by looking at the continuous initiatives that Bank has been undertaking to overcome the challenges in the Banking sector so that it can maintain its benchmark in all kinds of operations with improvement in its credit quality.
 
 
CBA Daily Chart (Source: Thomson Reuters)

 
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