CBA is presently trading at its two-months high suggesting Bulls are back after a short-term fear over the Greece crisis. Banking stocks are now recovering from the correction in April and May, and CBA is no different. Regulatory and economic environment are still benefitting big banks, but this could change. CBA, which is leveraged at three to four times, is taking advantage of low-interest rate and a boom in the real-estate market.

CBA provides banking, life insurance and related services for individuals, small businesses and medium-sized commercial enterprises. CBA made a huge profit of $1 million per hour, overshadowing all rival banks, but shares took a nosedive as earnings were largely stagnant. Unaudited profit for the company came in at $2.2 billion. The bank puts the blame on competitive headwinds affecting its net interest margin. Expense growth was also higher for the reported quarter on the back of increasing regulatory, compliance and remediation costs, such as the compensation plans for the victims of poor financial advice. 


Financial Highlights (Source: Company Report)

Further, the bank stated that business lending is growing at mid-single digit levels. However, funds under management in CBA’s wealth division spiked 7% in the quarter driven by the strong investment returns and foreign exchange gains. Tier-one capital of the company came in better by 20 basis points to 8.7%, after deducting the impact of the 2015 interim dividend. 


Dividends (Source: Company Report)

CBA provides corporate and general banking, international financing, institutional banking and stock broking and funds management such as superannuation product. CBA holds a significant market share, and enjoys a rise in the market share, in majority of its core business areas. Key business sectors of the bank include home loans and credit cards.  The bank is looking to sell tens of thousands of new Albert point of sale devices to be deployed in the Australian restaurants, cafes and retail stores, in order, to redesign the payment system, along with allowing businesses to gather vital data for the customers.


Cash ROE (Source: Company Report)

One of the primary force behind CBA’s record earnings was the low-interest rate scenario, which along with pushing profits made its fully franked dividend yields more attractive. For CAB, earnings per shares have gained by 11.9% CAGR since 2009, from $3.056 per share to $5.359 per share in 2014. Also, NPAT for the bank almost doubled to hit record-high in 2014. ROE for the bank has been over 18%, more than that of the rivals. Dividends have also been impressive. CBA gave a dividend of $4.01 per share in 2014 versus $2.28 in 2009, suggesting a CAGR of 12%. Further, dividend payout ratio of the bank has been between 73% and 77%, which by all measure is strong.

Banks have been attractive among investors for their high dividend yields in a low running economy. However, if interest rates do not fall any further then bank stocks will lose the sheen compared to other government bonds and similar investment. 

Over the last six months, CBA share prices are down over 7% indicating below average performance compared to the S&P/ASX 200 index. Another reason for a conservative approach on the bank is its enormous performance over the past two and half decades that has trapped the investors into believing that this abnormal growth rate of the company will go on. So, if such expectations are not met, we could witness some sharp downturn.

CBA is one of the most highly exposed banks to mortgage market in Australia, which means that any possibility of housing bubble is going to impact the bank in a way investors never could imagine. House prices, of late, have gone out of control threatening the future loan growth. Also, the decline in the bad debt charges has slowed, and could reverse impacting the banks earnings. Also, the profit that CBA makes on the loan it underwrites is measured in terms of Net Interest Margins (NIM), which is getting thinner owing to rising competition in the sector.

Greece Crisis could be an incident that could shake even the giant banks such as CBA, although nothing can be said as of now. Even though Greece is a small country in the European Union (EU), and should not be that much of a havoc creator in the stock markets across the worlds, but still a cautious tone is suggested on the banks, especially on CBA, which has a habit of getting caught in a global crisis as was seen in the Global Financial Crisis (GFC). Even though the banks have been stress-tested to wither threatening financial crisis, but a cautious approach is always recommended. 


Capital + Funding (Source: Company Report)

Only recently, Reserve Bank governor, Glenn Stevens and the Australian Prudential Regulation authority chairperson, Wayne Byrnes said that the banks are required to raise more capital, which in turn will adversely affect their return on equity. Rivals Westpac and NAB have already been asked to raise capital reserves. Also, there are chances that banks could be mandated to cut or halt their dividend payout to strengthen their financials.

No doubt CBA has been a favorite among the investors returning more than 80% in the last five years compared to 30% for S&P, but there is no guarantee that the run will continue as much depends on macro environment, which as of now does not look positive for CAB. Though CBA is still below its high, it could not be seen as a reasonable bargain as the bank trades at 15.7 of its forecast earnings and 2.9 price/book ratio, which are both more than the bank’s historical averages.


CBA Daily Chart (Source - Thomson Reuters)

On the basis of above reasoning, we rate the CBA as EXPENSIVE at the current stock price of $85.77.

 

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