CBA result raises concerns

Analysts see loan repayment deferrals and JobKeeper masking the worst underlying trends for CBA.

Analysts see loan repayment deferrals and JobKeeper masking the worst underlying trends for CBA. Picture: Annette Dew

Commonwealth Bank’s franchise and balance sheet are stronger than its rivals, but the bank’s annual result raised questions about credit quality and showed that profitability and growth in the retail division were under pressure, according to analysts.

UBS analyst Jon Mott homed in on CBA’s lofty valuation, saying the result demonstrated its business strength, but this was factored in to its share price.

After the stock’s rally, he said, the nation’s largest bank was valued at 10.8 times pre-provision profit.

“This is a 66 per cent premium to its (domestic) peers, a record since CBA’s privatisation almost 30 years ago,” Mr Mott said.

Morgan Stanley said in a note on Thursday that overall credit quality was sound, with non-performing loans rising by only 2 per cent quarter-on-quarter and 6 per cent half-on-half.

“However, we think that loan repayment deferrals and JobKeeper are masking underlying trends, revisions to risk ratings are lagging the real economy, and total provisions imply a (twofold) increase in non-performing loans,” analyst Richard Wiles said.

Mr Wiles said the common equity tier one capital ratio, up from 10.7 per cent at March to 11.6 per cent at June, was strong.

The ratio, he said, could reach 12 per cent in the current financial year with earnings retention and asset sales more than offsetting a 70 basis-point from higher risk-weighted assets.

On Wednesday, CBA announced an 11.3 per cent decline in 2020 cash profit to $7.3bn and declared a final dividend of 98c — its lowest since 2006 due to the coronavirus pandemic.

Chief executive Matt Comyn said most states had navigated the pandemic better than the bank had expected, although the outlook for Victoria was “more challenged” due to the imposition of a stage 4 lockdown after a spike in infections.

Goldman Sachs said asset quality, particularly in relation to loan deferrals, would be the key driver of the sector’s performance in the next 12-18 months.

In the shorter term, however, value would largely swing on margin performance, and it was here that CBA faced significant challenges.

Most importantly, the bank’s high-quality, low-cost deposit franchise was more of an earnings drag when interest rates were so low.

While CBA had been able to mask this through deposit and back-book mortgage repricing, it would become more difficult in the future because deposit rates were so close to zero and ­households were already under pressure from the effects of COVID-19.

Citi analyst Brendan Sproules said core profit was likely to improve in 2021 as interest margins were likely to be better than anticipated.

Commonwealth Bank of Australia CEO Matt Comyn. Picture: AAP

He said management had spoken with “an air of confidence” on the impact of COVID-19, as CBA maintained its provision for the virus at $1.5bn instead of following the pattern of offshore banks topping up their overlays.

“(Management) spoke confidently about the majority of deferred loans resuming re­payments, and took little underlying expenses for bad and doubtful debts despite some sector deterioration starting to emerge,” Mr Sproules said.

“At twice tangible book value, CBA is priced for a credit event which management expects rather than the market.”

Credit Suisse analyst Jarrod Martin said CBA’s headline cash result was ahead of his expectations, driven by bad debts that were lower than expected.

Surprisingly, no further COVID-19 provisions were taken in the fourth quarter.

“While we consider the ‘beat’ was lower quality and we factor in further provisions in 2021, the declaration of a dividend (with no discounted dividend reinvestment plan) is a positive for CBA and the sector,” Mr Martin said.

CBA shares closed down 2.6 per cent on Thursday at $72.43.