Relief Rally

Commonwealth Bank reported cash earnings for FY18 of $9.233bn, down 4.4% on a year ago and marginally below Ord Minnett’s forecast of $9.285bn. The final dividend of $2.31 per share was 1.0c higher than our estimate, bringing the annual dividend to $4.31 per share, fully franked.

 

What was a messy second-half result was largely in line with our forecast at the pre-provision profit level, although it looked to be around 3% below consensus. In that context, the share price reaction following the result on Wednesday, up 2.6%, was unusual, but the stock was weak heading into the result so it may well have been a relief rally.

 

Some investors will also have taken comfort from the bank managing to hold the decline in its net interest margin (NIM) to just 2.0bps half-on-half, and its reasonable cost control once the regulatory headwinds are excluded. The retail bank NIM fell 7bps, however, only partly offset by strength in New Zealand and business banking.

 

We expect these trends to continue, which supports our preference for banks with greater business exposure – that is, ANZ Bank (ANZ, Accumulate) and National Australia Bank (NAB, Accumulate) – over the more retail-exposed banks. We also see CBA’s group NIM outcome making mortgage repricing a little less likely in the short term, although we still cannot rule this out.

 

We expect CBA’s return-on-equity premium versus its major bank peers to keep falling, and we also see the potential for a dividend cut post its business divestments – such as the spin-off of its Colonial First State Global Asset Management (CFSGAM) business into a separately listed company. The 80% mark is above the board’s 70–80% target range, albeit the bank’s first-half FY19 core equity tier-one capital ratio should be comfortably above 10.5%. Retail shareholders may react negatively to a dividend cut, even though the new company holding the funds management and mortgage broking operations will likely be a dividend-paying entity.

 

CBA’s P/E ratio relative to its peers is currently around historical levels, leading us to maintain our Hold recommendation, while we have raised our target price to $78.00 from $76.00.

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