Dissappointing Commonwealth Bank (CBA) Results

Submitted by Craig Strzelecki on 13 February, 2008 - 12:52

Here is an update about the Commonwealth Bank (CBA) result released this morning by Australian stock analyst Macquarie Research Equities. They have an Outperform Recommendation with a 12-month price target of $60.00 on the stock.

The long anticipated Commonwealth Bank (CBA) result was released this morning. In what can only be described as disappointing, the result fell short of market expectations, missing consensus estimates by around 3.6%. The subsequent sell off has caused a further wave of selling across the rest of the financial sector, leaving CBA and WBC at levels not seen since 2006, and NAB and ANZ at levels not seen since 2005! With margin pressure remaining at the forefront of traders minds, where does this leave us on our view of the sector, and our sector preferences?

CBA reported a 1H08 cash net profit of $2.385bn, a figure that fell 3.6% short of Macquarie Research Equities (MRE) forecast. The interim dividend of $1.13, however, remains in line.
Further analysis of the result highlights the following:

Offsetting the strong pre-provision result was a larger than expected $333m impairment charge. The $138m increase is largely due to the corporate lending book given that consumer credit quality actually improved. Furthermore, the fact that impaired loans increased 3bp and coverage rose 1bp implies management’s decision to raise coverage was more a cautionary stance.

As MRE had expected, CBA reported a surprisingly strong NIM, well ahead of expectations at 2.17%. MRE believe the market had been looking for anywhere up to 20bp of margin pressure. Even excluding AIFRS volatility the NIM declined a modest 4bp compared to last half.

Elsewhere the results were very strong. The Retail and Premium Banking divisions both reported 8% cash NPAT growth while IFS cash NPAT grew 27%. Strong asset growth was supported by efficiency improvements and a robust margin outcome.

Other positives include a stable Trading result despite increased market volatility and speculation that departure of a group of traders earlier this year was linked to potential losses. MRE maintain a view that CBA and peers trade predominantly on an agency basis and should see limited risk of trading related losses.

The outlook statements given by management were very positive and pointed to underlying strength in the Australian economy including ongoing strong credit demand from the consumer segment. Wholesale funding pressures will clearly remain a risk although recent asset repricing trends and favourable asset mix shift in the business book should provide a positive offset. The bank made significant effort to address concerns about risks in its corporate loan portfolio, highlighting a high level of diversification and relatively small offshore lending exposure.

MRE reaffirms their outperform view with a 12-month price target of $60.00 for Commonwealth Bank (CBA). However, they also re-emphasise their preference for WBC and ANZ. The reason for this is due to the strong operating performance and positive margin results juxtaposed by the reduced risk in WBC’s corporate loan portfolio.