Commonwealth Bank still top dog despite lack of ‘buy’ recommendations

Rumours of Commonwealth Bank’s infallibility have been greatly exaggerated; at least that’s what sell-side analysts seem to think.

For the first time in a while, the nation’s most valuable bank had no “buy” recommendations in May and only one in June, as nine analysts rated the stock as a “sell” and six pegged it as “neutral”.

So what about CBA’s position compared to other banks, both here and offshore?

The short answer is it’s much better.

On Citi numbers, CBA remains the leader of the pack, despite the recent sell-off causing other Australian banks to move closer to the returns on equity and price-to-book ratios of their global peers.

CBA’s position is even more counterintuitive when you think that the bank’s huge mortgage book in both Australia and New Zealand leaves it more exposed to falling house prices and slowing mortgage growth.

The question, then, is whether the bank can retain its most-favoured status.

Citi identifies five key periods over the last decade or so when CBA underperformed its local rivals by about 14 per cent.

Two of those periods, including the Austrac fine for multiple transgressions of anti-money laundering laws, related to own goals from the bank.

The most recent example of the remaining three periods ended in February last year when house prices were growing strongly as the threat of large-scale Covid-19 loan losses subsided.

CBA’s price-to-book ratio increased by 20 per cent, but it was easily outpointed by the 50 per cent average increase for its less highly valued peers.

The much more common narrative over the last two decades or so has been consistent outperformance by CBA amid booming household debt and deleveraging in the business sector.

Two factors could lead to a reversal – a downward spiral in house prices over a prolonged period, and one or more of the bank’s rivals relegating the Commonwealth Bank to also-ran status.

It’s doubtful that CBA has engineered a model which adjusts for management failure.

However, its economics team assumes a relatively benign outlook for official interest rates, which are projected to peak at 2.1 per cent at the end of this year with a risk of 2.35 per cent.

This compares to the market’s much more pessimistic forecast of 4 per cent.

The reason for CBA’s rates outlook is that consumer sentiment is “already in deeply pessimistic territory”, with households expected to feel the heat from recent and upcoming rates rises despite having large savings buffers in place.

If the bank’s benign forecast holds true, the damage to house prices will be minimised.

That way, CBA boss Matt Comyn gets to continue his victory lap.

Cash flow is king

Supply-chain financing is back, as pandemic-induced bottlenecks tighten the cash flow tap for a range of small and medium-sized businesses.

The number of National Australia Bank customers using invoice financing, which enables businesses to borrow against unpaid invoices, has surged by 22 per cent over the last year.

Commonwealth Bank has also entered the market in the last 12 months, continuing to stalk NAB in its SME heartland and joining other incumbents Westpac and Scottish Pacific.

The level of activity might seem unsurprising, given cash flow ranks with the skills shortage as SME sector’s key challenges in the current environment.

Supply-chain financing, however, has had a bad rap since the Greensill collapse in March last year.

While Greensill’s pitch was helping SMEs to get their money faster, the model became much more complicated, as the financier sold IOUs to outside investors.

The paper was regarded as low risk because the sales had already occurred.

But Greensill then extended the model beyond current invoices to expected future sales, and compounded the risk by backing companies in chancy industries.

Ultimately, the lender collapsed as a crisis in confidence took hold.

NAB and its rivals conduct old-school invoice financing, which is a long way from the Greensill model with none of its trappings.

As the nation’s biggest invoice financier, the bank is now paying an average of one million invoices a month – a post-pandemic high – to help ease the burden of slower supply chains and stock movements.

The core problem for SMEs is not so much that payment terms have blown out; rather; it’s taking longer for suppliers to produce an invoice and seek payment.

Previously, it would only take two weeks to send out an invoice for trusses in the building industry.

Now it can take 14 weeks, and sometimes up to 20 weeks.

NAB’s executive for regional and agribusiness Julie Rynski says access to capital can be a problem for some businesses which may not have fixed assets to pledge as collateral.

“Invoice financing can help businesses access cash quickly by unlocking funds within their unpaid invoices, reducing the dependency on bricks-and-mortar security such as property,” Rynski says.

“When businesses have the cash to pay their invoices quickly, they can get stock sooner and ensure other important payments are made promptly such as their team’s salaries.

“Ultimately, the quicker a business gets cash in the door, the faster suppliers get paid and the faster our economy moves.”

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