Commonwealth Bank of Australia

CBA Details

Trading At 52-Week Higher Levels: Commonwealth Bank of Australia (ASX: CBA) is a leading provider of integrated financial services, providing retail, business and institutional banking, funds management, superannuation, life insurance, general insurance, broking services and finance company activities. Majority of its operations are conducted in Australia and New Zealand. Additionally, it also operates in various countries such as the United Kingdom, the United States, China, Japan, Singapore, Hong Kong, Indonesia, and South Africa. The bank recently announced that it has ceased to be a substantial holder of ARB Corporation Limited and The Star Entertainment Group Limited, effective from June 14, 2019.

In a previous update, CountPlus Limited (ASX: CUP), together with a special purpose subsidiary of a discretionary trust established by CUP for the benefit of Count Member Firms (CMFT), will acquire Count Financial Limited (Count Financial) from its current owner Commonwealth Bank of Australia. CUP will hold 85% and the CMFT 15% of Count Financial.The binding sale and purchase agreement have been set at $2.5 Mn, and the purchase price represents a discount to net tangible assets of Count Financial.

H1FY19 (Ended on December 31, 2019) Financial Performance: The statutory net profit after tax (NPAT) including discontinued operations for the period was reported at $4,599 Mn. Bank’s cash NPAT from continuing operations increased by 1.7% to $4,676 Mn as compared to previous corresponding period.

Its operating income decreased by 1.9% pcp to $12,408 Mn, with volume growth offset by lower net interest margin, lower markets and fee income, and the impact of weather events.CBA’s net interest margin was reported at 2.10%, which is 4 basis points lower than the H2FY18.Its operating expenses was reported at $5,289 Mn, which is a reduction of 3.1% with elevated risk, compliance and remediation costs offset by prior period one-offs.


H1FY19 Key Metrics (Source: Company Reports)

What To Expect: As stated in the bank’s earnings release for 1H FY 2019, the Australian economy continues to perform well with GDP growth at trend, near full employment, and wage growth edging higher. These strengths remain supported by the growing population, the infrastructure boom, and continued demand for the Australian exports supported by growing incomes in Asia. The housing market transition is a rational outcome of the lending policy changes introduced over a number of years, especially following an extended period of outpaced growth in some markets.

As the economy is strong and lending standards have improved, credit quality remains sound. Moreover, with the re-election of PM Scott Morrison, the financial system responded positively to the market, however real estate sector outlook might not be bright in the near term. Therefore, a decrease in lending activities can be expected in the forthcoming year.

Stock Recommendation: CBA’s stock is trading at close to its 52 weeks higher levels, and therefore the probability for correction increases. On the valuation front, its Price-to-Book Value, Price-to-Cash Flow and EV-to-Sales multiple for Trailing Twelve Months (TTM) stand at 2.1x, 12.3x, and 5.8x, which are higher than the industry median of 1.5x, 8.2x and 3.1x, respectively, indicating overvalued position at the current juncture.

Hence, considering the aforesaid facts and current trading level (as it is trading towards its 52-week higher levels), we suggest  investors to book profits at the current level and recommend a “Sell” rating on the stock at the current market price of $80.190 per share (up 0.527% on June 17, 2019).


CBA Daily Chart (Source: Thomson Reuters)

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