Commonwealth Bank of Australia

 
Better than Industry NIM’s coupled with Improving asset quality: Commonwealth Bank of Australia (ASX: CBA) has recently disclosed an update on the unaudited non-cash items and the changes to financial reporting. As regards the update, a non-cash loss of $169 Mn will be included in the statutory NPAT which would be reported by the bank in their Interim results. The bank has in its endeavour to become a simpler bank and has made modifications in their operating model which hasn’t impacted the bank’s cash NPAT.  However, the same has its effect on the financial reporting pattern followed by the company.

The bank’s board had earlier decided to divest its Global asset management business to Mitsubishi UFJ Trust and Banking Corporation (MUTB).
 
What to Look Out Moving Forward in CBA: The analysts thus expect that this divestment would cause a 300 Bps fall in the earnings of the bank and hence there is a possibility of a dividend cut by the bank going forward.

Going forth, the bank will implement new strategies for cost reduction which could help in achieving the operating performance. This objective would be achieved with the help of implementing a simpler operational model, focussing on digitization and automation as well as through the usage of data analytics.
 
For the first quarter ended 30 September 2018 the company’s operating income was up on the back of higher other banking income, however, the net interest income growth was flat. Consequently, the group’s NIM’s were lower in the quarter due to higher funding costs & home loan price competition. The bank achieved a growth in Cash NPAT of 11% during the 1Q19 v/s 2H18 predominantly due to a fall of 7% in the operating expenses and the rise in volumes across the sectors.
 

 
CBA’s Loan Impairment expense (Source: Company Reports).
 
On the performance metrics front, the bank has always had superior NIM’s and continued the trend with interest margins of 2.15% for FY 2018, vis-a-vis the Industry margins of 1.94%. Meanwhile, if we look at the past six month’s performance, the stock has receded by 2.91% as on 21 January 2019.
However, considering the operational efficiency that has been delivered by company and improving asset quality with long-term potential, we maintain our “Buy” recommendation on the stock at the market price of $72.180, which is reflective of a low level as market sentiments are slightly weighing on the stock at the current juncture.
 

Bank of Queensland Ltd

 
Improving NIM’s coupled with falling loan impairment expenses: Bank of Queensland Ltd (ASX: BOQ) has recently disclosed that the bank has finalized the remuneration which is to be paid to the company’s interim CEO named Mr. Anthony Rose. The remuneration of Mr. Rose shall increase from the current $720,000 per annum to $1,000,000 per annum, in view of the additional duties that have been assumed by him.
 
On 10 December 2018, the bank had terminated the agreement to sell the St. Andrews Insurance business to Freedom Insurance Group on account of non-fulfilment of the prerequisite conditions for the sale.
 

 
BOQ’s Loan Impairment Expense trends (Source: Company Reports)
 
During FY18, the net interest income rose by 4% on a Y-o-Y basis to $965 million. This was on account of the interest margin of 1.98% which was an improvement of 5 Bps over the past year and is marginally above the industry median of 1.94%. Moreover, the margin improvement was predominantly on account of the improvement in the funding costs. Also, the loan loss provisioning has declined to a low of 0.09% as compared to the industry median of 0.70%.
 
Expectations to Increase Capital Investments: Going forth, the bank has announced its ambitious plans to increase the capital investments in the year 2019 with enhanced focus upon the digital platform and the customer experience.These investments will have a positive impact on the company so that it can compete in the challenging business environment.Meanwhile, if we look at the past six month’s performance, the stock has receded by 3.33% as on 21 January 2019.
 
Hence, considering the bank’s net interest margins (which is higher than the industry median) as well as expectations for the positive momentum, we maintain our “Buy” recommendation on the stock at the current market price of $10.290.
 

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