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Thursday, 7 May 2015

CBA in correction territory

Quarterly results

It has been a quite incredible run-up over the past seven years for Commonwealth Bank's share price, getting close to marking a "ton up" at a 52 week high of $96.69 from well below $30 at the 2009 market nadir.

A sharp fall in the share price after yesterday's quarterly results sees the Commonwealth Bank of Australia ("CBA") officially joining the other major banks in correction territory at below $83, the market capitalisation peeling back to around $143 billion.

The 1 year share price chart below shows that the price is still some way above where it was 12 months ago.

While valuations have eased, the market could still hardly be described as cheap or offering value in the traditional sense. 

I concluded as much here fully two year ago and the market cap at that time was only $108,000 million.

Long term holders have, however, continued to benefit from a wonderful flow of franked dividends.

Since the financial crisis the bank has paid out grossed up dividends at an appealing 7 per cent per annum.

Indeed even at today's prices CBA is still offering similarly attractive grossed up yields, but would-be buyers must accept that such strong share price growth is far less likely from its more elevated base.

Death by acronym

While the share price correction will doubtless be used as evidence of impending doom the trading results could hardly be described as weak.

CBA recorded both statutory net profit and unaudited cash earnings (the preferred measure) for the first quarter of ~$2.2 billion, with revenue growth broadly similar to that recorded in 1H 2015.

However, expense growth for the quarter was higher in Q1 2015 as CBA grapples with a raft of regulatory requirements (FATCA, FoFA, Stronger Super, LAGIC) as well as remediation costs and competitive pressure on lending growth and net interest margins.

Higher regulatory costs might be expected to have an impact on cash earnings going forward as compensation for the banks "too big to fail" status.

According to CBA's disclosures its tier one capital position improved by 20 basis points to 8.7 per cent, while deposit growth was strong at an annual growth of more than 10 per cent.

Sound credit quality

Perhaps of most interest yesterday (to me anyway) were CBA's market disclosures on credit quality.

Cash loan impairment expense has improved dramatically since the financial crisis, but looks as though it may now have reached its cyclical low.

Similarly, troublesome and impaired assets - while still declining in Q1 2015 - are doing so at a slower pace and might be expected to revert higher over the period ahead.

Source: Australian Securities Exchange

90+ day home loan arrears are also tracking at very low levels, but may now have ghosted past their low.

The wrap

Despite how this will likely be reported, this was a robust set of results for CBA.

The share price moving into correction territory largely reflects that valuations had previously been pricing in perpetual growth rates which may not be achievable as regulatory requirements ramp up.

It will be interesting to see how the personal and home loan arrears measures fare in the prevailing low interest rate environment. 

To date it has been lovely to see loan arrears and loan impairments improving so strongly over the past seven years.