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Friday, 13 February 2015

CBA on course for record earnings

Records to fall at CBA

Commonwealth Bank (ASX: CBA) reported its half year results, and the numbers were humongous, teeing up another record year of results.

8 percent seemed to be the favoured number of the day, with statutory profit up 8 percent to $4,535 million and the preferred Cash NPAT figure (which reverses out the impact of certain non-cash or accounting adjustments booked in the period) following suit by rising 8 percent to $4,623 million.

The full year NPAT for CBA in 2014 was $8.65 billion, so it looks as though a new spasm of records are set to tumble in FY2015.

Cash EPS at 2.84 also showed an 8 percent improvement on the comparative prior period, and following a thumping ROE of 18.6 (hello-oo leverage!) the fully franked interim dividend was lifted by 15 cents - or 8 percent, of course - from $1.83 to $1.98 per share.

Cash machine

Long term shareholders have made out like bandits receiving total dividends per share of more than $38/share since the turn of the century, a quite extraordinary stream of income. Woosah.



Share price has soared

To say that the company is close to fully valued on a risk-adjusted basis would be something of an understatement.

In recent weeks the CBA share price has soared to well over $90/share resulting in a market cap just shy of $149 billion. 

This is a shame for folk who were sucked in by talk of a "bank bubble" when CBA actually was trading at very reasonable PE ratios.

With a price/book now hovering close to 3 (net assets at the end of FY14 were $49.3 billion) and a PE ratio sneaking beyond the "mid-teens", there is far less value to be found at these prices.

Actually that's an understatement...there was no value in the stock in the traditional value investing sense more than 20 months ago as I looked at here previously, and valuations have since roared higher.

Indeed, CBA's share price has soared from ~$35/share to well over $90/share in only a decade, while pumping out a tremendous dividend stream. 


Credit quality

CBA was almost too quick off the market to highlight the maintenance of its "strong capital position" - noting pleadingly in its results headline: "Basel III Common Equity Tier 1 (CET1) (Internationally Comparable) of 13.3 per cent...and customer deposits up $32 billion to $458 billion, representing 63 percent of funding." 

The group was also slightly underweight for the period in certain higher growth segments such as home lending - yet it maintained a 25.2 percent market share (down fractionally from 25.3 percent).

Analysts will therefore be focussed very heavily on loan impairments and credit quality.

Reflecting the recent Fitch Dinkum Index findings which showed home loan arrears declining to the lowest level since 2007, and 90+ day loan arrears at their lowest levels in half a decade, arrears have declined substantially since 2012.


The statutory accounts will record that CBA pushed through a loan impairment expense of $440m of H1, down 4 percent from $457 million in the corresponding prior period.


Regulators would do well to monitor lending excesses as the cost of borrowing continues to decline.

Interest rates to fall further

Unfortunately for those hoping for more appealing term deposit rates, lower share market valuations or lower asset prices, the cash rate looks set to fall further still, perhaps even as soon as March 3.

After yesterday's soft jobs report futures markets priced a 73 percent chance of another cut.

The view may very well be that if interest rates do need to fall again, then it may just as well be next month.

Implied yields on cash rate futures contracts have sunk as low as 1.925 percent as soon as May 2015, and remain well under 2 percent until H2 2016. 

There appears to be little respite for net savers.


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Disclaimer - this is not financial advice. Consult a financial advisor before making investment decisions.