Commonwealth Bank of Australia recently posted first-half FY17 cash earnings of $4.907 billion, slightly ahead of Ord Minnett’s forecast of $4.851 billion, primarily driven by a better outcome on expense growth, with revenues, provisioning, and tax all in line with expectations.
The 1.0 cent increase in interim dividend to $1.99 a share, representing a circa 70% payout ratio, was a surprise, given the decline in the bank’s core equity tier-one (CET1) ratio and the headwinds still to come from the wealth de-gearing process and asset risk weights are incorporated.
In the big picture, the CBA result showed positive dynamics for the sector, to wit, improved trading income, cost management and provisioning.
For CBA, a much-improved run-rate on fee income (courtesy of a re-negotiated deal with Mastercard), and a better outlook on costs (courtesy of a $400 million software write-down) sees minor earnings upgrades.
The bank’s headline CET1 ratio fell to 9.9% from 10.6% at FY16, reflecting the move to higher mortgage risk weights. Capital was flattered, however, by a 30 basis points reduction in risk-weighted assets from improving asset quality despite provisioning being largely unchanged, which largely offset a ‘normalisation’ of interest rate risk in the banking book charges.
CBA posted a good-quality result, but the stock remains fully valued, leading us to maintain our Hold recommendation and our $75.00 target price.