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CBA VIDEO



 

Stock Of The Day - CBA (SELL)

Commonwealth Bank of Australia (ASX: CBA) reported interim results for the half-year ended 31 December 2014 in February. The statutory net profit after tax (NPAT) was $4.535 billion representing an 8% increase over the same period in the previous year. Cash profit of $4.623 billion also represented an 8% increase. The board of directors declared an interim dividend of $1.98 per share, again an increase of 8% over the interim dividend for the previous year. The dividend payout ratio on a cash basis is approximately 70% of cash NPAT and is in line with the target of 70% to 80% for the year.


1H15 Results (Source: Company Reports)

As per CBA, the results reflected an outcome of staying with a consistent strategy in what is described as a high-quality franchise. The focus on the long-term priorities such as people, technology and productivity continue to work for the benefit of shareholders, investors and other stakeholders. The focus on productivity has delivered cost savings estimated at $300 million over the last 12 months. For the first time, the group made investments in innovation including a Group Innovation Lab and acquired new capacity with the acquisition of TYME, a global leader in digital banking systems based in South Africa.

Net interest income as well as other banking income rose by 6% and average interest earning assets climbed by $49 billion to $739 billion while average interest-bearing deposits grew by $27 billion to $432 billion. Net interest margin fell by 2 basis points to 2.13% compared to the previous year which reflected the competition on asset pricing though this was partly offset by a decline in wholesale funding cost. Strong growth in income combined with discipline and control on expenses resulted in a 12% growth in the cash earnings on retail banking services.


Group Return on Equity and Return on Assets (Source: Company Reports)
 
Average funds under administration in wealth management services rose by 11% and 85% of these funds performed better than their respective three-year benchmarks. Cash earnings in New Zealand and in Bankwest grew by 15% and 8% respectively. The Bank also reported cost savings of about $312 million over the past 12 months owing to the enhanced focus on productivity, because of which the cost to income ratio showed an improvement of 70 basis points.

 
Divisional Contribution (Source: Company Reports)

Loan impairment expenses as a percentage of the average gross loans and acceptances improved by 2 basis points and 3 basis points, respectively. Provisioning policies remain conservative with a total of $3.9 billion amounting to 1.25% of risk-weighted assets. Investments for generating long-term growth continued to be strong at $595 million which included $167 million for projects related to compliance and risk.
 
The outlook commentary for 2015 pointed out that the Australian economy contained much of what was necessary to move away from investment in resources. These include the population growth, a dynamic construction sector, greater access to trade helped by the weaker Australian dollar and the strength of the banking sector. The Bank would continue to invest in its present strategies and with hard work in an environment that is increasingly competitive, customers, employees and other stakeholders should all benefit.


Strategy (Source: Company Reports)
 
The Bank continues to enjoy significant market share as a group along with growth in market share in the majority of their key businesses. This includes core businesses such as home loans and credit cards. Volume growth is generally in line with system growth and outperforms it in some categories.
 
The Bank expects to sell tens of thousands of new Albert point-of-sale devices for use in Australian restaurants, cafes and retail stores with the potential of transforming the payment system while enabling businesses gather valuable information on their customers. The device is a wireless Android tablet developed in partnership with German banking technology company Wincor Nixdorf which could create opportunities to generate revenues both domestically and globally. It runs on an open source platform and, if successful, developers can be expected to create a whole range of applications over time.


CBA Daily Chart (Source - Thomson Reuters)
 
The prices of shares for the Bank have been declining for some time with fluctuations in between giving out a signal of being underperforming the S&P/ASX 200 index. There are many reasons for the pessimistic outlook on the stock for the markets but we are detailing some of the more pertinent ones. Recent comments made public by Reserve Bank governor, Glenn Stevens, and the Australian Prudential Regulation Authority (APRA) chairperson, Wayne Byrnes point out in no uncertain terms that Australian banks need to raise more capital which will have a negative impact on their return on equity. Moreover, banks have been popular with investors because of the high dividend yields in a low return economy though, unless interest rates decline even further, bank stocks are likely to lose ground to risk free government bonds and similar investments. All in all, softness persists with regards to the growth opportunities for bank stocks in the short-term future. Of course, the 2015 March quarter trading update to be announced on 06 May 2015 may throw some more light on the overall performance and market sentiments. We do not foresee any great surprises while cash profit is expected to increase.
 
The latest news on the Reserve Bank reducing the official cash rate to a record-low 2% which may augment consumer spending but there is also a probability to witness high risk of future instability in the economy. As per the market updates, CBA indicated to pass on only 20 basis points of the 25 basis point cut to variable home loan rate. There is also an indication of increasing the deposit rates by 0.55 percentage points to 3.05 per cent. The real estate secured small business loan rates are also indicated to be cut by 25 basis points. Overall, this may turn to be a boon for some and a ban for others. Given the market sentiments, we believe that the stock is about its fair value.


Accordingly, we put a SELL recommendation for this stock at the current price of $88.14.