CBA share price: Top 10 things we learnt from the interim results

Despite posting strong volume growth across the business, particularly in home lending, the Commonwealth Bank of Australia (CBA) reported lower profits and an interim dividend below the Board's target payout range, though somewhat ahead of analyst consensus estimates.

ASX-listed bank stocks traded with increased volatility in response to CBA's interim results, while the broader market rallied modestly, with the ASX 200 benchmark up 37 points by 1:27PM.

Earnings

The expectation was always for banks, including CBA, to report lower earnings. The question was rather not if they would, but what would the magnitude of the declines be.

Overall, CBA reported statutory profits (NPAT) of $4,877 million, down 20.8% on a year-over-year basis; while also reporting cash profits (NPAT) of $3,886 million, representing a decline of 10.8% on a year-over-year basis. The bank attributed these declines to the low interest rate environment and COVID-19, which has placed significant pressure on Australia’s population and economy.

Margins

Low interest rates as well as ‘higher liquid balances’ also ate into the bank’s net interest margins (NIMs), with CBA reporting a 10 basis point decline, year-over-year. By the close of the half, CBA’s NIM stood at 2.01%.

Lending

Despite those headwinds, CBA continues to report robust volume growth across its key lending streams, with its home lending division growing at 1.5x system during the half. This impressive growth was attributed to ‘consistent operational excellence’.

Growth aside, CBA increased its loan impairment expenses by $882 million during the half, as a result of 'high collective provisions.' And while the bank reported that 'arrears on home loan and consumer finance remain low', this looks to be heavily impacted by the manner in which APRA is allowing banks to treat loans which are in a state of deferral. CBA said 25,000 of its home loans, worth approximately $9 billion, are currently being deferred.

Business lending and business deposits also grew at a significant rate, at 3x and 1.7x system, respectively. Do these growth figures justify CBA’s above market earnings multiple?

Trading

Elsewhere, the bank flexed the power of its diversified financial offerings, reporting that trading volumes doubled year-over-year, hitting $110 billion in H1 FY21. Over 230 thousand new CommSec accounts were created in the half, with more than 70% of these new account holders making use of the bank’s mobile trading/ investment app. While this should hardly come as a surprise, given the rush of retail traders we are currently seeing flood the markets, the results are nonetheless impressive.

Costs

Operating expenses crept higher in the half, primarily driven by increased investment spend, increased staffing and information technology costs and COVID-19 related operational staffing measures costs.

All up, this saw H1 FY21 operating expenses come in at $5,566 million, ahead of the $5,206 million recorded during the first half of FY20.

Capital

CBA continues to tout a robust capital position, reporting a common tier equity 1 (CET1) ratio of 12.6%, firmly above APRA’s unquestionably strong capital requirements.

Dividends

The consensus was for CBA to deliver an interim dividend of 145 cents per share, according to Citi, heading into the H1 results. The bank today revealed a fully-franked dividend of 150 cents per share, ahead of consensus, but below the Board’s targeted dividend payout ratio of between 70-80% of cash profits (NPAT).

Ultimately, this was a miss on some individual analyst estimates leading into the interim results. Morgan Stanley for example was forecasting the bank to pay a 155 cents per share interim dividend, while Citi was expecting a 165 cent per share dividend.

Investors will now likely be keen to see what kind of final dividend CBA will announce as part of its full-year results, due out later this year.

Outlook and CEO commentary

While CBA’s Chief Executive Officer Matt Comyn adopted a generally positive tone in regards to Australia’s economic outlook, he nonetheless noted that:

‘There are a number of health and economic risks that could dampen the pace of recovery. We are prepared for a range of scenarios and have taken a careful approach to provisioning.'

On a more granular level, Mr Comyn pointed out that:

'The Bank's leading franchise and strong foundations mean it is well placed for the challenges ahead. The strength of our balance sheet and capital position enable us to support customers and help lead the country through recovery.'

CBA, ANZ, Westpac and NAB share price reactions

The market initially responded positively to CBA’s interim results, with investors bidding the stock higher at the open. Though the stock opened higher, as the morning session progressed the mood had decisively changed, with CBA down 1.34% to $86.25 per share by 11:21 AM.

Other banks got caught in that sell-off, with ANZ, WBC and NAB all trading into the red before noon. Westpac reversed that trend by the afternoon session, gaining 0.52% by 1:57PM. CBA remained in the red.

Broker reactions

Questions of valuation linger for CBA. Analysts from Macquarie responded to today’s interim results by reiterating their Underperform rating and $78.00 price target on the bank. Indeed, despite robust volume growth, analysts from the investment bank said 'the current multiple is difficult to justify.’

‘While today’s result should not lead to material changes to pre-provision expectations and likely upgrades from lower impairments, it appears that improving earnings profile and excess capital are already reflected in CBA’s valuation premium,’ the investment bank added.