Big Numbers

Commonwealth Bank of Australia (CBAQ) posted FY17 cash earnings of $9.881 billion, slightly ahead of Ord Minnett’s forecast of $9.805 billion, and declared a fully franked final dividend of $2.30 per share, above our estimate of $2.23. Despite higher mortgage risk weights, the bank also reported a stronger-than-expected capital position, with a common equity tier-one (CET1) ratio of 10.1% versus our 9.8% forecast.


Our FY18 earnings forecasts remain largely unchanged post the result, with slightly lower net interest income (NII) offset by higher contributions from the trading and wealth operations and a slight reduction in provisioning.


Given limited FY18E earnings growth, and further capital headwinds expected from its wealth business de-gearing, we expect CBA’s return on tangible equity (ROTE) will continue to drift back towards that of its major bank peers.


An adverse ruling in the proceedings initiated by Australian Transaction Reports and Analysis Centre (AUSTRAC) stands out as a clear risk, although we note the financial impact, if any, will not be known for some time as the matter proceeds through the courts. There is also the risk of state-based bank levies.


Despite the positives from CBA’s FY17 result – higher trading contribution, improved positioning and increased CET1 ratio – we still see limited FY18E EPS growth.


We continue to expect CBA’s ROTE to drift down to that of its peers over time. As such, we value CBA on generating a ROTE around 1.0 percentage point lower than what it is achieving today. Given this view, we maintain our Hold recommendation on CBA and our target price of $76.50.

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