Commonwealth bank of Australia (ASX: CBA) is the largest bank and the second largest publicly listed company in Australia. CommBank has a market capitalisation of A$113 billion.

 

What is the current economic environment facing the banks?

The major banks are trading in PE ratios in the low to mid-teens and dividend yields of more than 5%. This means that the major banks are priced more cheaply relative to some other sectors of the market. However, the major banks face significant headwinds including the economic impacts of COVID-19, slow credit growth (also reflecting weak economic growth), pressures on net interest margins (which could lower profitability) and increased regulatory requirements (both capital and lending requirements). That is, in the short term at least, the major banks may have lower growth prospects than other sectors of the market as the banks performance is linked to the success of the Australian economy and there is a significant risk that bank dividend payments could fall over the next year or so. Nevertheless, the sharp fall in the major banks share price since the onset of COVID-19 could provide opportunities for investors looking beyond the short term.

 

What are the most recent updates in CommBank’s operations?

CommBank released its HY20 report on 12 February 2020. CommBank’s HY20 report was strong considering the challenging environment the banking sector is currently facing in Australia. CommBank reported a cash net profit after tax of A$4.5 billion, down a modest 4.3% compared with the corresponding period.

An interesting point about CommBank’s HY20 result was the result from CommBank’s home lending business. CommBank’s home lending business increased by 4% in HY20 compared with HY19. In addition, this compares with growth of total home lending for the Australian economy of approximately 1.5%. That is, CommBank increased market share in the home lending business.

An important to note is that CommBank’s capital position and leverage ratio is strong. CommBank’s Tier 1 capital is 11.7% and well above APRA’s requirements which were recently relaxed. This means that CommBank has the ability to absorb losses without having to raise additional capital.

In addition, CommBank’s Leverage Ratio, which is defined as Tier 1 Capital as a percentage of total exposures was 6.1% at 31 December 2019 on an APRA basis and 7.0% on an internationally comparable basis. Further, CommBank’s Liquidity Coverage Ratio (LCR) is strong and holds enough liquid assets to meet 30-day net cash outflows (average LCR of 134%). This ensures that if the economic environment remains subdued longer than the estimated 6-month period, CommBank should not be at risk of defaulting.

 

What is the outlook for CommBank?

CommBank’s share price has fallen from A$91.05 in February 2020 to around A$63.30, a fall of around 30%. CommBank is preforming better than Australia and New Zealand Banking Group (ASX: ANZ)National Australian Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) over the past 20 years and there is no reason to think this will change looking forward. Also, CommBank is arguably ahead of the other 3 major banks in addressing issues arising out of Hayne royal commission into the financial services industry. Investors that want exposure to the Australian banking sector could consider CommBank over the other 3 major banks. This is based on CommBank’s superior performance and its comparatively strong financial position.


 

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This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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April 1, 2020