No Quick Remedy

Commonwealth Bank delivered a third-quarter FY19 cash net profit excluding notable items of $2,338bn, down 9% on the same period last year. The trading update was weak across the board, featuring soft underlying revenue trends, much higher than expected remediation provisions and deteriorating asset quality trends.

 

We make the following observations:

 

  • Revenue fell 4% on the quarterly average of 1H19. Even adjusting for headwinds from a lower day count on net interest margins of $100m and a $30m impact from higher insurance claims, we estimate revenue was still 1.1% lower in the quarter despite significant full-period mortgage repricing benefits. Non-interest income fell 10% on a headline basis. The rebasing of fees and commissions is expected to have a permanent impact, with some residual impact in 4Q19.
  • CBA topped up its provisions for remediation, regulatory and compliance programs by $714m. This included $334m of aligned advice remediation costs, bringing the total to $534m. There was also $156m of ‘other program costs’ – which we think peers have largely treated in their accounts as ‘business as usual – and $152m of banking customer refunds.
  • CBA’s asset quality metrics deteriorated over the quarter. Bad and doubtful debts increased to $314m, equating to 17bp of gross loans and acceptances (GLA), up from 15bp in 1H19. Consumer arrears were higher in all segments, with housing arrears rising 4bp on the first half to 71bp/GLA. Total accounts in negative equity came in at 3% for the group, with approximately three quarters located in Western Australia and Queensland. Gross impaired assets and those classified by the bank as ‘Corporate Troublesome’ rose quarter-on-quarter.

Overall, the result highlighted that while CBA sits in an enviable position in the Australian banking landscape, it is not immune to the challenges that have emerged in the broader marketplace. We have reduced our earnings forecasts by 4% over the FY20–21 period. Based on our revised numbers, CBA sits in the fair- to full-valuation camp. However, we also note the strong capital position that should emerge over the next 12 months and medium-term cost-savings potential. We maintain our Hold recommendation, although we have trimmed our target price to $71.60 from $73.55.

Ord Minnett Research Trial

We invite you to sign up for a three month trial of our Ords Monthly investment newsletter. This report includes our latest opinions, research and share market insights that may enhance your current portfolio structure.