Commonwealth Bank of Australia

Bullish Sign Depicted by Commonwealth Bank Chart: Commonwealth Bank of Australia (ASX: CBA) multinational bank based out in Sydney, Australia. It provides services such as retail banking, business, and private banking, Institutional Banking and Markets, Wealth Management segment and general insurance business across New Zealand, Asia, the United States, and the United Kingdom.

The bank has the highest number of branches and ATMs in Australia with 1,267 branches and 4,253 ATMs across Australia.

FY18 performance and FY19 guidance:

• During FY18, the bank reported a 4% decline in statutory net profit after tax from continuing operations of $9.375 billion on account of one-off items i.e., $700 million of AUSTRAC civil penalty and a few others.

• A similar Dividend per share of $4.31 in FY18 to that of $4.29 in FY17.

• Same Common Equity Tier 1 ratio of 10.1% in FY17 and FY18.

• A decline of 1.6% in Return on equity of 14.1% in FY18 on account of regulatory requirements for higher levels of capital.

• Total return to the shareholder of -7% in FY18 with a 10-year TRS (total shareholder return) of 222%.

• It paid a tax of $3.994 billion in FY18.

• An increase of 2.6% in total operating income reported at $25.907 billion on account of increase in net interest income due to repricing interest-only and investor home loans, funds management income, and insurance income.

• It reported an increase in home loans by 3.3% and a dip in consumer finance and business and corporate loans by 1.1% and 1.8%, respectively.

• For FY19, Net interest income is expected to be $18.616 billion, total revenue of $26.278 billion, and Common Equity Tier 1 ratio of 11.2%.

Fundamental Analysis:

• The bank reported a Net interest margin of 2.15% which has been consistent over the past five financial years.

• As on date, the relative value of the stock is calculated to be around $57.

• The % fee revenue has declined by almost 10% over the past five financial years.

• The Tier 1 risk-adjusted capital ratio has improved by 2% over the past five financial years and is currently calculated at 12.3%.

• The pre-tax ROA has been consistent over the past five financial years at 1.4%.

• The bank has 1.77 billion shares outstanding with a market cap of $122.85 billion and a beta of 1.03x.

•  It has a dividend yield of 6.29% and P/E ratio of 12.82x.


Key Capital Ratios (Source: Company Reports)

From the technical analysis standpoint, in October 2018, the stock made a new support level of $65.27 post that the stock has started moving in an uptrend and is expected to be higher in the upcoming period. Over the past one year, the scrip price has dipped by 14.20% and is currently trading at reasonable PE level of 12.82x. The Relative Strength Index can also be seen in a positive direction, and the price is currently trading near to the lower band of the Bollinger band. All these indicate a bullish sign in the scrip price. With the decent performance of the bank, better-expected earnings guidance for FY19 and a bullish sign depicted by the chart, we see an undervalued position at the current juncture. Hence, we maintain our “Buy” recommendation on the stock at the current market price of $68.48.
 

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