Commonwealth Bank of Australia Q3 results preview

When are the bank’s next set of results due?

Unlike NAB, ANZ and WBC which have just finished wrapping up their half-yearly results releases, the Commonwealth Bank of Australia (CBA) is set to release its third quarter (Q3) trading update next Wednesday, 13 May, 2020.

Provisions, earnings and dividends

Using the other big fours’ recent results as a benchmark, investors will likely be closely watching CBA’s Q3 cash earnings, its CET1 ratio as well as metrics around asset quality.

Westpac, for example, booked an impairment charge of $2,238 million in H1 FY20, and said that it had increased its allowances for expected credit losses to $5,791 million, up from $3,924 million since September 2019, equating to an increase of ~47%.

ANZ, by comparison, booked a $1,675 million credit impairment charge in H1 FY20, with the bank’s allowances for expected credit losses across all its divisions hitting $4,501 million, up 33% since September 2019.

With those outcomes as a reference, investors will likely be closely watching any changes in CBA’s asset quality as it relates to both credit impairment charges and allowances for expected credit losses.

For reference, as part of Commonwealth’s first-half results, for the period ending 31 December, the retail focused bank noted that, 'Asset quality remained sound with loan impairment expense of $649m. As a percentage of gross loans and acceptances, loan loss rates increased 2 bpts to 17 bpts (14 bpts excluding the drought/bushfire provision). Corporate and consumer loan loss rates were 24 bpts and 14 bpts respectively.'

'Prudent levels of provisioning were maintained, with total provisions of $5,026m equating to total provision coverage of 1.34%,’ the bank also said during its H1.

Elsewhere, given that CBA is targeting a ‘gradual return’ to a full-year payout ratio target range of 70-80% of NPAT, investors will be closely watching how the coronavirus pandemic has impacted the bank’s profitability, given the steep H1 earnings declines witnessed by the other big four banks.

Looking at how Morgan Stanley believes Commonwealth’s Q3 will play out, the investment bank’s analysts are currently estimating that CBA’s third quarter cash profits will decline by 30%, that the bank will make a $1 billion Covid-19 related provision and that its CET1 ratio will hit 11.2%.

Moreover, it was noted that:

‘While the profit decline and higher provisioning are unlikely to surprise investors in the current environment, we think the trading update will lead to less confidence in the capital and dividend outlook, and make CBA's premium trading multiples harder to justify.’

Concrete details of of CBA’s final FY20 dividend will be made as part of the bank's full-year results, due on 12 August.

How has the CBA share price performed recently?

In terms of relative performance, though CBA has outperformed its big four peers on a year-to-date (YTD) basis, it has lagged the ASX 200 benchmark.

Between 1 January and 6 May, the CBA share price fell 24.45%, compared to the ASX 200's decline of ~19.5%. Of its peers, Westpac has been the worst performing on a YTD basis, declining 34.012%, ANZ has dropped 34.01%, while NAB has fallen 32.48%.

At the time of publishing, CBA was trading at $59.44 per share.

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