Looks Can Be Deceiving

Commonwealth Bank delivered a first-quarter FY20 cash net profit from continuing operations of $2.3bn, ahead of the run-rate required to hit Ord Minnett’s forecast of $4.48bn for 1H20. The first quarter is typically CBA’s strongest for the year, however, and we note there were a number of one-offs and timing benefits that are unlikely to be replicated in the second quarter.


The trading update showed surprisingly solid trends, coming as it was on the heels of the difficult sets of numbers reported by the other major banks recently. In particular, the strength in net interest income (NII) – up 3% on a headline basis, or 2% adjusting for day count – was surprising.


We highlight the following two factors that we see as flattering the NII performance: 1) there was a 4bp tailwind quarter-on-quarter (QoQ) from short-term wholesale funding costs; and 2) CBA’s home loan growth is unlikely to remain at these levels. In addition, non-interest income was boosted by a number of one-off factors.


Total loan growth was not disclosed, although the Pillar 3 regulatory capital update suggested good growth in lending exposures of about 1.5% QoQ. This indicates to us the headline net interest margin (NIM) was flat to 1bp wider, boosted by the narrower bank bill swap rate to overnight index swap rate (BBSW–OIS) spread, which provided a 4bp tailwind for NIM. Excluding this impact, NIM was said to be lower in the quarter “due to headwinds associated with a low-interest-rate environment, which will continue to impact margins in future periods”.


We have reduced our earnings estimates by 4%, on average, over the FY20–22 period, although this reflects a reassessment of how long elevated regulatory costs are likely to persist, rather than lower revenue.


CBA is looking expensive at current share price levels, with our new target price of $74.00 (reduced from $74.20) being below the current share price. The bank is in a comfortable capital position, however. On balance, this has led us to maintain our Hold recommendation, although CBA is our least-preferred of the big four banks.