CBA has defied the doubters as its shares take off again on its full year profit

As one of the most expensive big banks in the world, the pressure was always going to be on CEO Matt Comyn to deliver some extraordinary numbers.

CBA chief Matt Comyn says he worries about the things he can control and the share price isn’t one of them. Picture: Jane Dempster

Commonwealth Bank chief executive Matt Comyn says he spends remarkably little time thinking about the gravity-defying surge in his bank share price this year.

“We probably spend all our time thinking about how we can create value and things we can control,” Comyn tells The Australian.

Which is just as well. The pressure was always going to be on for CBA to deliver some extraordinary numbers to support the eye-watering valuation currently implied in its shares. Indeed, the surge has taken CBA to one of the top 13 banks of the world with a market value of more than $220bn. In recent months, it overtook US major Citigroup and is now closing in on Wall Street darling Morgan Stanley.

Commonwealth Bank’s posted a 2.3 per cent drop in full year profit to $9.83bn. Picture: NCA NewsWire / Morgan Sette

While there is a growing number of market analysts who believe gravity will soon catch up to CBA, today’s not that day.

Even in the face or uninspiring headline numbers, including a 2.3 per cent drop in full year cash profit to $9.83bn, flat revenue and slow progress on a share buyback, CBA shares jumped as much as 1 per cent.

The bank’s high level of cash generation and lower-than-expected level of bad debts backed a 4 per cent boost to the second half dividend.

Investors are now starting to wonder, if CBA can deliver such a robust outcome in a cooling economy – what happens when things start picking up again? Interest rates at least seem to be on hold for the next six months, but more expect the next move to be down than up. When the economy booms, CBA as the nation’s biggest bank booms with it.

So has the market got it wrong? Yes and no.

Indeed a briefing earlier Wednesday, it was an unusual situation where Comyn fronted a room of sheepish bank analysts and not one had a buy rating on his well-regarded bank.

With the bank trading at more than 3 times book and as much as a 70 per cent premium to rivals, it makes CBA one of the most expensive – if not the most expensive – publicly traded big banks in the world.

One analyst – CLSA’s Ed Henning – has a “hold” rating on CBA while almost a dozen others have a sell call or equivalent on the shares. Among sell side analysts, the consensus price for CBA’s shares in 12 months is $95.67. Today the bank is trading just over $133 in last month touched a record of more than $137.

“We just can’t justify the premium” Macquarie analysts told clients earlier Wednesday and reiterated their underperform rating. Big investors who have ignored their advice have done well – for now.

The big risk

As it continues to push higher there is plenty that can go wrong, particularly for a big bank. But these are the biggest risks for the shares.

The bank’s shares have been the beneficiary of massive international investor interest and that has come off slightly as part of the great unwind of Japan’s carry trade. More rate rises in Japan may pressure CBA further.

Meanwhile, a more rapid slowdown of the economy and a cracking of low lending losses may suck the wind out of CBA shares. So too a surprise interest rate hike if inflation gets away will hurt.

Comyn points out there is more nuance that flow into investor perceptions about the bank.

This includes the “stability and consistency of both execution, earnings and dividends”.

“On a relative basis that explains some of the different valuation metrics – particularly with offshore financial institutions,” Comyn says.

Commonwealth Bank counts nearly one in three adult Australians as a customer. Picture: NCA NewsWire / Morgan Sette

Being able to deliver a fully franked dividend to local investors also has a real benefit.

For now CBA is operating in an economy that is grinding slower. It experienced a modest tick-up in stressed housing loans, with mortgage arrears now running at the highest level in the current cycle. However on a historical measure they remain bang on long term average with little sign of stress given the sharp rise in interest rates since the pandemic.

The bank continues to focus on loyalty and has just notched up record consumer net promoter score for any major bank. It counts one in three adult Australians as its main bank as it takes share from rivals. Its share of new migrant business is an extraordinary 62 per cent.

Comyn says pressure will continue on households through this higher interest rate environment – he is tipping a cut next year. Small businesses are being watched given they are the next line starting to feel the squeeze from a downturn in consumer spending.

The CEO says the next six months will continue to be challenging for many Australians. Further out into 2025 and beyond as interest rates are starting to reduce, household confidence and spending will rebuild as inflation eases.

“We think there are opportunities, certainly for Australia. As the largest financial institution we play an important role in allocating capital to growing the economy.”

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Originally published as CBA has defied the doubters as its shares take off again on its full year profit