Stocks’ Details

Commonwealth Bank of Australia

A Quick Look at September 2019 Quarter: Commonwealth Bank of Australia (ASX: CBA) provides banking, financial and related services. The market capitalisation of the bank stood at ~A$141.71 Bn as on 12^th November 2019. Recently, the bank updated the market with its performance for the first quarter of FY20. The bank stated that it witnessed a rise of 3% in net interest income, as a result of 1.5 additional days in the quarter. However, on a day-weighted basis, net interest income experienced a rise of 2%, supported by the volume growth in core markets of home lending, business lending and household deposits. The following picture provides an overview of balance sheet and capital strength:


Balance Sheet and Capital Strength (Source: Company Reports)

What to Expect: CBA anticipates its operating context to remain challenging as it adapts to heightened regulatory change, increasing competition, evolving customer preferences, and need to invest in risk and compliance, and technology and innovation. It is focused on continuing to serve its customers’ needs and making the necessary changes to become a simpler and better bank.

Stock Recommendation: Net Interest Margin stood lower in comparison to June 2019 due to the headwinds associated with a low-interest-rate environment, which will continue to impact margins in future periods. As at 30 September 2019, the Group’s Basel III Common Equity Tier 1 (CET1), Tier 1 and Total Capital ratios on APRA basis stood 10.6%, 12.5% and 16.1%, respectively. As per the ASX, the stock of CBA is trading at a price to earnings multiple of 16.48x as compared to the industry median of 14.7x on TTM basis. The stock is available at a price to cash flow multiple of 9.3x against the industry median of 6.9x. The stock of CBA delivered returns of 0.14% and 8.91% in three months and six months, respectively. Currently, the stock is trading close to its 52-week high levels of $83.990. Therefore, considering the valuation metrics, current trading levels, and increase in troublesome and impaired assets, we give an “Expensive” recommendation on the stock at the current market price of A$80.830 per share, up 0.974% on 12^th November 2019.
 

Australia and New Zealand Banking Group Limited

Decline in Statutory PAT: Australia and New Zealand Banking Group Limited (ASX: ANZ) is a leading bank of Australia with a market capitalisation of ~A$72.51 Bn as on 12^th November 2019. ANZ recently announced that Paul Dominic O’Sullivan has been appointed as a director with 4,078 ordinary shares and 9,250 capital notes 2 on 4^th November 2019. The bank would be conducting its 2019 Annual General Meeting on 17^th December 2019. ANZ reported a statutory profit after tax amounting to $5.95 billion, representing a yoy decline of 7% for the full year ended 30 September 2019. However, cash profit for its continuing operations stood at $6.47 billion, flat with the prior comparable period. The below picture depicts an overview of dividend schedule for 2020:


2020 Dividend (Source: Company Reports)

Future Guidance: As per the Annual Report for 2019, the bank stated that the Australian housing market is slowly recovering. However, the bank expects challenging trading conditions to be continued for the foreseeable future. Earnings will continue to be pressurized by record low interest rates in Australia and global trade tensions. The bank will simultaneously manage compliance and remediation costs.

Stock Recommendation: The bank’s Common Equity Tier 1 Capital Ratio stood at 11.4% and around $3.5 billion above the Australian Prudential Regulation Authority’s ‘unquestionably strong’ measure. The stock is currently trading slightly below the average of its 52-week trading range of $22.980 - $29.300. On the valuation side, the stock is available at EV to sales multiple of 3.9x against the industry average of 10.4x on TTM basis. In addition, the stock is trading at EV to EBITDA multiple of 2.8x in comparison to the industry average of 15.7x. The stock of ANZ generated a return of 7.21% on YTD basis. The bank has maintained its focus on improving customer experience, balance sheet strength, and improving its culture and capability on the face of challenging business environment, increased competition, regulatory change and global uncertainty. Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of A$25.340 per share, down 0.938% on 12^th November 2019.
 

Westpac Banking Corporation

A Rise in CET1 Ratio: Westpac Banking Corporation (ASX: WBC) is a well-known bank of Australia. The market capitalisation of the bank stood at ~A$99.14 Bn as on 12^th November 2019. Recently, the bank announced that it has opened its share purchase plan, which was announced on 4^th November 2019. It added that eligible shareholders can apply for up to A$30,000 of new fully paid ordinary shares without incurring any brokerage or transaction costs. WBC is aiming to raise around A$500 million under the SPP offer, which is anticipated to close on 2^nd December 2019. As at 30^th September 2019, common equity Tier 1 (CET1) capital ratio stood at 10.67%, representing a rise of 3 bps from 31 March 2019.

 
CET1 Ratio (Source: Company Reports)

Outlook: The bank stated that the growth in the Australian economy would continue to be subdued with GDP growth to remain below trend at around 2.4% in 2020. It anticipates that the Australian economy would lift somewhat supported by lower interest rates, improved housing sentiment and targeted income tax cuts. WBC also expects system credit growth in the year to September 2020 to lift from 2.7% to 3%, which will be driven by housing wherein, it expects a lift from 3.1% to 3.5%, although business credit growth is anticipating a slowdown.

Stock Recommendation: For FY19, the bank reported a net interest margin of 2.12%, reflecting a fall of 10 basis points. The credit quality of the bank remains decent and impairment charges remain low at 11 basis points of loans. On the valuation front, the stock of WBC is trading at a price to book multiple of 1.5x as compared to the industry average of 2.8x on TTM basis. The stock is available at an EV to sales multiple of 4.8x against the industry average of 10.4x on TTM basis. The stock generated a return of 2.43% over a period of six months. Therefore, considering the bank’s preparation for its digital future by investing in a new digital-only banking platform, valuation, credit growth outlook and annual dividend yield of 6.26%, we give a "Buy" recommendation on the stock at the current market price of A$26.800 per share, down 3.528% on 12th November 2019 as the stock traded ex-dividend.

 
Comparative Price Chart (Source: Thomson Reuters)

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