Commonwealth Bank: Nabbing business banking market share

About the author:

Azib Khan
Author name:
By Azib Khan
Job title:
Former Senior Analyst
Date posted:
12 August 2021, 8:00 AM
Sectors Covered:

  • Commonwealth Bank (ASX:CBA) has reported FY21 cash NPAT of $8,801m, 1.6% lower than our expectation. A final dividend of $2.00 per share fully franked has been declared.
  • CBA has announced a $6.0bn off-market share buyback, in line with our expectation. We expect a further $6.0bn off-market share buyback to be conducted in FY23F (previously expecting a further $5.0bn in FY23F).
  • Our view remains that CBA is a high-quality bank but overvalued. Retain Reduce.

Result is supportive of positive sector thematics

While FY21 cash earnings were slightly weaker than our expectations, this was largely the result of the net credit loss provision release in 4Q21 being lower than our expectation. Nonetheless, there was a net provision release of $192m in 4Q21 which appears to be significantly better than the consensus expectation on this front.

Also appearing to be better than consensus was CBA’s net interest margin (NIM) outcome of 2.04% for 2H21. The NIM increased by 3bps from 1H21 to 2H21.

We believe consensus expectations continue to be pessimistic on the bad debt and NIM fronts for the major banks sector, and the above two points may consequently result in favourable revisions to consensus forecasts for the sector.

CBA appearing to be the exception to the cost reduction thematic

In addition to credit loss provision releases, NIM tailwinds and capital management potential, we have been pointing out the potential for absolute cost reduction for the sector as a positive thematic.

However, we have also been pointing out that we believe CBA’s major bank peers will close in on CBA’s cost-efficiency lead over the next three years. CBA’s FY21 result provides us with further reason to believe that this will be the case.

An element that sticks out for us in CBA’s FY21 result is the elevated investment spend of $1.8bn in FY21, up 26% from $1.4bn in FY20.

Growth in CBA’s operating expenses – excluding remediation – was 2.4% in FY21 compared with growth in total operating income of 1.7%. That is, jaws were negative in FY21. This was despite a 45% reduction in amortisation and write-off of capitalised software from FY20 to FY21.

With us not having much reason to believe that the uptrend in CBA’s investment spend will begin to reverse anytime soon, and with the likes of ANZ and WBC having laid out absolute cost reduction targets for the next three years, we believe it is increasingly likely that CBA’s lead on the cost efficiency front will narrow over the next three years.

The threat to NAB is real

CBA’s FY21 result tells us that CBA is serious about building Australia’s leading business bank. This partly explains CBA’s elevated investment spend. It presumably also explains much of the negative jaws outcome of 7 percentage points in the Business Banking division in FY21, with cost growth of 8% and revenue growth of 1%.

While our view is that the potential for CBA to gain an edge over peers with the investment spend in other areas is not clear, we do believe the investment in building up business banking capabilities will boost CBA in this space relative to peers.

CBA has today flaunted impressive statistics in relation to business banking, including notable increases in business lending market share and business deposits market share. We discuss these statistics further inside this report.

However, as CBA grows its business bank, we are likely to be of the view that the overall profile of the Group loan book is moving up the risk curve.

Investment view and changes to forecasts

We have increased our cash EPS forecasts by 2.5%/0.1% for FY22F/FY23F respectively.

Our target price, based on our DDM valuation, is (login to view).

We retain a Reduce recommendation.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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