Commonwealth Bank of Australia

CBA Details

Trading Update on 3QFY21: Commonwealth Bank of Australia (ASX: CBA) provides financial services, including retail, business and institutional banking, funds management, superannuation, general insurance, broking services, and finance company activities. During 3QFY21 ending 31 March, CBA has registered a NPAT of ~$2.4bn against ~$1.2bn in 3QFY20 on the back of lower loan impairment expenses. CBA has seen 8.1% YoY of volume growth in business lending in 3QFY21, 13.9% YoY of volume growth in household deposits and 5.3% YoY of volume growth in home lending in 3QFY21. The company has reported an increase of 2% in its operating income from a quarterly average of 1HFY21 on the back of an improved economic outlook and robust volume growth.

Volume Growth in 3QFY21 (Source: Company Reports) 

1HFY21 Financial Highlights: The company has registered a decline in its operating income to $11,961mn in 1HFY21 against $12,023mn in 1HFY20 on the back of lower interest rates. The company has registered a decline in its Cash NPAT to $3,886mn in 1HFY21 against $4,356mn in 1HFY20 due to the lower interest environment on deposits. CBA has reported an increase in its average interest earnings assets to $144,716mn as on 31 December 2020 against $137,024mn as on 31 December 2019.

Key Risks: The company is exposed to liquidity risk. The bank operates in multiple countries. Thus, any severe movement in foreign exchange prices may lead to forex losses for the company.

Outlook: CBA has divested its Australian life insurance business (CommInsure Life) and likely to contribute an additional 2bpts to the group’s CET1 ratio in the June’21 quarter. 

Valuation Methodology: Price/Book Value based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of CBA gave a return of ~9.84% in the last one month and a return of ~10.61% in the last three months. The current market capitalisation of CBA stands at ~$167.79bn as of 11 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$58.65-~$95.57. On the technical analysis front, the stock has a support level of ~$88.6 and a resistance level of ~$95.71. We have valued the stock using a Price/Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in average interest earning assets as on 31 December 2020 and an increase in CET1 in 1HFY21. For this purpose, we have taken peers Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ) to name a few. Considering the spike in the stock price over past months, divesting its insurance segment, a decline in cash NPAT, associated risks with the business and valuation, we are of the view that most of the positive factors of the company have been discounted at current trading levels. Hence, we suggest investors to wait for better entry levels and give an “Expensive” rating on the stock at the current market price of $95.57, up by ~1.046% as on 12 May 2021.

CBA Daily Technical Chart (Source: Refinitiv, Thomson Reuters) 

National Australia Bank Limited

NAB Details

An Update on Scheme of Arrangement for Acquisition: National Australia Bank Limited (ASX: NAB) is engaged in banking services, international banking, investment banking, wealth management services, trustee, and nominee service. On 11 May 2021, the company informed the market regarding the approval from Federal Court of Australia for the Scheme of Arrangement to acquire the remaining share capital in 86 400 Holdings Ltd. NAB is considering acquiring capital in 86 400 Holdings Ltd to enhance its growth in digital banking through UBank. The Scheme of Arrangement has become effective from 12 May 2021 and will be implemented on 19 May 2021.

Dividend Declaration: NAB has declared a dividend of AUD 0.6000 to its shareholders. The ex-date for dividend is on 13 May 2021 and the payment date of dividend will be on 2 July 2021.

1HFY21 Financial Highlights: The company has registered a decline in its net interest income to $6,840mn in 1HFY21 against $6,888mn in 1HFY20 on the back of lower earnings rate on deposits in a low interest rate environment. Despite a decline in net interest income, NAB has posted an increase in net profit to $3,230mn in 1HFY21 against $1,541mn in 1HFY20 on the back of significant decline in its operating expenses. NAB has registered a decline in its cash and liquid assets position to $52,831mn in 1HFY21 against $58,338 in 1HFY20.

Revenue and Profit Growth in 1HFY21 (Source: Company Reports)

Key Risks: The bank is mainly dependent on interest income. Low interest rate environment may lead to a decline in interest income for the bank. The bank deals in multiple currencies, thus, any severe movement in foreign exchange prices may lead to financial losses for the company.

Outlook: The Group has entered into an agreement to sell BNZ life to Partners Life for NZ$290mn. The completion of the transaction will be subject to regulatory approvals and expected to complete in March 2022. 

Valuation Methodology: Price/Book Value based Relative Valuation Method (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of NAB gave a return of ~-1.08% in the last one month and a return of ~6.24% in the last three months. The current market capitalisation of NAB stands at ~$88.43bn as of 11 May 2021. The stock is currently trading above the average 52-weeks’ price level range of ~$15.11-~$27.84. On the technical analysis front, the stock has a support level of ~$24.32 and a resistance of ~$29.17. We have valued the stock using a Price/Book Value per share multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering an increase in net profits in 1HFY21, decline in its total liabilities, and strengthening its presence in digital banking by acquiring complete share capital in 86 400 Holdings Ltd. For this purpose, we have taken peers Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA). Considering the company has seen an increase in profit despite a decline in net interest income in 1HFY21, increasing footprints in digital banking through acquisition, dividend declaration for its shareholders, current trading levels and valuation, we recommend a “Hold” rating on the stock at the current market price of $26.540, down by ~1.008% as on 12 May 2021.

NAB Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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