Why Matt Comyn’s CBA needs to be really extraordinary to support record share prices
The risk for chief executive Matt Comyn is the temptation to pull back from doing what’s needed to be done to preserve CBA’s thumping share price gains.
Commonwealth Bank’s extraordinary share price rise, now risks building a gilded cage around the lender. The surge has been building over the past two years and at its peak pushed CBA’s valuation past $300bn, making it one of the world’s most expensive banks. It’s long overtaken the likes of Citigroup and has been within striking distance of a clutch of Wall Street banks including Goldman Sachs.
The surge, including a near 30 per cent rally last year, means CBA chief Matt Comyn, who likes to run the bank as prudently and predictably as possible, gets punished for trying something new.
In ordinary times, an increase in CBA’s investment spending on technology would barely register on CBA’s profit machine, in fact it would be welcomed given CBA’s success in tech to date, On Wednesday it triggered a near 6 per cent share crash.
For context, CBA just delivered a 4 per cent increase in full year cash profit to $10.3bn, a number slightly ahead of analyst estimates. Revenue beat the market, while the full year dividend also lifted 4 per cent at $4.85 a share. Profit margins were up again, albeit supported by markets income.
All the bank’s forward indicators, such as lending losses and loan demand, were pointing to a recovery in the economy. Elsewhere, CBA’s more under pressure customers were spending and saving again. That’s good for the bank.
CBA continues to make gains against rival National Australia Bank in business lending, and more customers are getting a home loan directly from the bank instead of going through a costly mortgage broker. Interest margins will see some slight squeeze given the RBA’s string of cash rate cuts, although the bank will make it up in other areas. All told, there was not enough in CBA’s numbers for analysts to dramatically change their forecasts.
The latest profit numbers Comyn delivered may have been good, but they were not good enough. To support its ultra-premium share price, CBA needs to be extraordinary.
Leading into the results, CBA’s shares were trading at the equivalent of 30 times earnings, that’s roughly double of its Australian big bank rivals.
Until the bank’s earnings catches up with its sky-high valuation – which it won’t – brace for more share price jolts at each profit outing. You can almost bank on falls in February and August next year and the years after that, even if CBA keeps delivering on its run “good” results.
It took 22 years from the point when CBA listed on the ASX to crack the first $100bn valuation. The next $100bn took 11 years. The climb to $300bn came about in just 16 months. (Before Wednesday’s falls, the bank had pulled back 6 per cent from its June peak).
The surge has been mostly fuelled by passive funds flow – that is, hundreds of billions of global funds jumping on the index.
Indeed, CBA’s investors are no longer Australian dominated. Led by the big global index funds, US ownership of the bank is running at 56 per cent. Direct Australian funds have fallen to a record low of just 26 per cent of the bank’s registry. Europe represents another 10 per cent.
At the same time, there’s a big dash of FOMO (fear of missing out) and every want to get on board. Compounding the squeeze is a share scarcity. At 1.6bn, the number of physical CBA shares on issue is around half the average of Australia’s other big banks.
Buyback block
The gains may be good for investors, but there are consequences. The share price rise has been so hot that CBA has barely made any headway on its $1bn share buyback it launched in 2023.
It’s so far only spent $18m in the past year and in total $300m has been spent. It has been
forced to extend the program several times. Just $18m was spent in the past year. Buying shares at these level would be burning capital, so it sits on the balance sheet, weighing down returns.
The bank’s board has weighed up a special dividend, although this will come at a cost of the franking credit pool available. Banks like buybacks as offer more flexibility in returning funds to shareholders. They can turn them on and off to keep the bank cashed up.
While Comyn is conscious of the bank’s share performance, it’s ultimately up to the market to make its own decision on the price.
“We focus on the things that we can control, and it’s important not to ever be distracted by things that are largely outside your control,” he tells The Australian.
“For us, that’s a combination of both executing and delivering a reasonable or a strong result in any given year, but I think also most importantly making sure we’re as well-prepared and positioned for the long term”.
However, the risk for CBA is to not be tempted to pull back from what’s needed to be done in order to preserve the gains in the shares.
And this is exactly what Comyn is trying to navigate.
It’s part of his thinking behind upping investment spending the past year to $2.3bn, much of this is on tech which is pushing up CBA’s cost growth at a faster rate than revenue growth.
Comyn says he is “open” to increasing tech spend in coming years, although doesn’t have any specific plans on this front. However he insisted investment spending at the bank in the near term at least won’t go backwards.
“We’re positioning the organisation for the future, and we believe that that’s going to require higher, ongoing high levels of investment spent,” he says.
The aim is to invest for boost returns over the longer term.
“There’s a number of things we could have done differently if we wanted a stronger result, but we feel we’re at a really important period as some of the technology transitions”.
The latest example of this is a new multi-year partnership with Sam Altman’s OpenAI. This will see CBA become the partner choice with the Silicon Valley AI darling, including rolling out cutting edge AI tools to staff.
The partnership represents an evolution of Comyn’s close links with Microsoft chief Satya Nadella. Microsoft was an early investor in OpenAI and uses the tech to power its applications.
Comyn says OpenAI will be deployed on combating some of the most challenging aspects of financial services – namely combating scams, fraud and financial crime. There’s also an eye for looking at productivity gains and savings across the bank, however this is a longer term play. His approach is that AI should be a platform for improving customer offering, than a pure cost exercise.
The technology will position the organisation competitively. “Speed of execution is going to matter over the long term,” he says.
None of the 16 bank analysts that follow CBA have a buy recommendation on the stock. Two have a hold and 14 have a sell recommendation. The consensus share price target is $121. Even after this week’s falls, CBA shares are trading at around $170 each.
Good and predictable won’t be rewarded. Nor will investing for the long term. But there’s plenty at stake.
It would be a lot worse if Australia’s biggest bank was instead running its engine close to the red line.
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