Repricing Required

Commonwealth Bank of Australia posted third-quarter FY17 unaudited cash earnings of $2.4 billion, in line with the run rate required to achieve Ord Minnett’s second-half FY17 forecast of $4.8 billion but slightly below consensus expectations.

 

A decline in net interest rate margin during the quarter and the impact of Cyclone Debbie on insurance income was offset by a significantly improved provision charge of $202 million, or 11 basis points of gross loans and acceptances, to leave earnings forecasts largely intact.

 

The recently announced repricing of interest-only and investor-mortgage products is only coming into effect now, so it has not helped third-quarter FY17 margins, but it will lead to an improved margin outlook. Reflecting this, we forecast a recovery of margins in the June quarter to deliver a 1.0 basis point improvement in margins over the second half.

 

Regarding the bank levy imposed in the federal budget, the proposed 1 July commencement date of the levy means there will only be a 1.0 basis point drag on net interest margins evident in second-half earnings across the major banks. Accordingly, the banks have time on their side to assess the implications and competitive responses over the coming six months or so.

 

In capital, a core equity tier-one ratio of 9.6% saw the run-off of risk-weighted assets fund the 23 basis points deduction for wealth de-gearing and leaves CBA on track to report a core equity tier-one ratio approaching 10% at FY17E.

 

Despite the potential for near-term outperformance via dividend-rotation trading, we still see CBA as expensive, leading us to maintain our Hold recommendation and target price of $76.50.

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