AU earnings: CBA - rising dividends amidst looming profitability challenges

The Commonwealth Bank of Australia reports next week, on Wednesday, the 9th of August. In this week’s special edition of Investor Spotlight, we discuss what to expect from the results, examine its current investment case, compare CBA to the other Big 4 banks, and analyse its stock price.

What to expect from CBA’s full-year results

CBA is expected to report a 2% increase in net income for FY23, but weaker profits for the half. According to data compiled by Reuters, full-year profit is forecast to rise to $10.2 billion. However, that is broken down by a $5.3 billion profit in the first half of the year and a $4.9 billion profit in the second half.

The slowing growth in earnings comes despite sustained growth in the bank’s top line. The fall in profitability is likely from moderating net interest margins, which are thought to have peaked in 1H23 at 2.10%.

Challenges to profitability

Analysts are lukewarm on the outlook for CBA’s profitability, with issues such as eroding margins combined with concerns around slower loan growth as Australia’s economy cools and the potential for higher provisions a risk to the outlook. The bank’s earnings are forecast to decline over the next 12 months.

CBA is forecast to increase its dividend. Analysts are tipping that consistent with the bank’s target of a 70% - 80% pay-out ratio, the bank will pay a dividend of $2.26 for the half, taking the total full-year dividend to $4.33.

Dividend payment for 22 Feb 2023

Brokers remain negative on CBA stock

The analyst community is negative towards CBA shares at present. The stock is in a downgrade cycle, with deteriorating economic fundamentals and a lofty valuation leading to a consensus “sell” rating on the stock.

In fact, not one of the 15 analysts surveyed by Reuters recommends buying the stock, with four calling a hold, 10 a sell, and one a strong sell. The target price is a significant discount of $87.80.

Broker recommendations chart

CBA richly valued compared to peers

The outlook for the broader banking sector in Australia is soft, but CBA trades at a much richer valuation than its peers. CBA’s price-to-earnings ratio is floating around 17.8x, which is above its long-term average and, according to Simply Wall Street, at a premium to its other Big 4 counterparts.

CBA’s price-to-earnings ratio chart

The CBA has historically traded at a higher multiple than other banks. Its size, competitive advantage, sensitivity to Australia’s property market, and status as a way of getting investment exposure to the broader Australian economy have contributed to its richer valuation.

However, with fundamentals for bank shares deteriorating, the downside risk in CBA shares appears greater than other banks, which are trading closer to fair value and in line with long-term multiples amidst a correction in prices over the past 12 months.

The Big 4 shares chart

CBA stock technical analysis

CBA shares are in a consolidation pattern and trading within a range. Sellers have emerged above $110 per share, while dips have been bought when the stock falls towards $90.00. The last major sell-off for the stock came following its interim results in February, in a sign that sellers could again control the price if full-year numbers overwhelm.

CBA weekly chart

On the daily charts, the technicals also indicate an imminent pullback for the stock. The daily RSI has recently pushed into, then dropped out of, overbought territory, which has marked significant reversals in the past. Upward-sloping trendline support may be a key level to watch on any pullback.

CBA daily chart