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Thursday, 9 November 2017
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CBA Quarterly Results and Resurrection

THE QUARTERLY RESULTS

The CBA quarterly results are out. The market seems to like it. Share price up 1% first thing compared to the market which started down Wednesday. Note that these are quarterly results and don’t have a dividend. The CBA has a June year end whereas the other big banks have a September year end. The announcement is only five pages long most of those are charts, that compares to the NAB’s 83 page results announcement last week. Main points:

  • Cash profit up 6% to $2.65 billion.
  • Net operating income up 4%.
  • Net interest margin was up thanks to a rise in investor and interest only borrowing rates under APRA’s lending guidelines. That was “partly offset by the impact of the banking levy, higher funding costs and competition”.
  • Expenses up 4%.
  • Loan impairment expense running at 11 basis points of gross loans which is down from 15 basis points last year.
  • They took no provision for the AUSTRAC proceedings and are lodging their defence.
  • Tier 1 capital ratio at 10.1%. That compares to APRA’s “unquestionably strong” benchmark of 10.5%. When the sale of their life insurance business to AIA group goes through next year it will add 70 basis points to their tier 1 capital ratio putting them over the guideline.
  • There was no outlook commentary.

The chart shows the stock in uptrend for now. From these levels on these yields and after a lot of negative sentiment the banks will likely outperform in any market correction so domestic fund managers would if anything be thinking about neutral weightings if not going overweight when/if the market tips over.

Here are the numbers:

THE RESURRECTION

Recovering its relative performance. After their quarterly results the share price popped 2.8% leaving the other banks behind. 

The very real possibility now is that the results will be the catalyst for the CBA to recover its premium over the other banks after showing a 6% increase in profit, which outstripped the other banks. 

This was perhaps the most important chart for some fund managers Thursday morning.

It shows the performance of CBA relative to the bank sector. The CBA has recently lost its usual 10% PE premium but looks like recovering it now. Notably it is on the same PE as the other banks (give or take a touch). This is not normal.

To get back to the typical premium would require a 7% rise in the CBA relative to the bank sector and yesterday’s vote of confidence is the sign that sentiment is turning. The stock has been in a sentiment hole and is, as of yesterday, coming out of it. It seems like the AUSTRAC money laundering problems and the criticism over culture and governance could be distracting us from the CBA’s relative undervaluation. Selling the stock down on governance and culture issues ignores the fundamental superiority of the CBA which is what the results highlighted yesterday.

Unlike the other banks the CBA is still growing its dividend and has done for the last 10 years (excluding 2016). They will report another record profit this year which will almost certainly translate into higher dividends. The 4% increase in operating income and 6% increase in cash earnings was better than the other banks. The forecast is for return on equity to hit 16.5% on the back of yesterday’s numbers. That ranks them second in the world according to the AFR. That compares to the ANZ on 14%, the NAB on 14% and Westpac on 13.8%.

On top of that they have recently sold their life business for $3.8 billion and that will put their Tier 1 capital ratio above the APRA guidance of 10.5% by 2020. On that basis this is a stock that is by APRA’s admission, “unquestionably strong”. 

These are not really trading stocks but they are very important stocks for fund managers to time correctly, it is a big index stock fund managers don't want to get wrong. It looks as though the CBA is now a buy relative to the other banks.

 

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