Commonwealth Bank’s interim profit tipped to surpass $5bn for first time, dividend to climb
Commonwealth Bank’s first-half profit is set to eclipse $5bn for the first time, as the nation’s biggest home lender reaps the benefits of rising rates and loan losses that remain in check.
Commonwealth Bank’s first-half profit is set to eclipse $5bn for the first time, as the nation’s biggest home lender reaps the benefits of rising interest rates and loan losses that remain in check.
The bank reports interim earnings on Wednesday and will shed light on what is expected to be a stellar earnings period for the sector, ahead of a bumpier operating climate as credit growth cools and rates continue to increase.
Bloomberg consensus estimates have CBA reporting an interim cash profit of $5.17bn for the six months ended December 31, up from $4.75bn in the same period a year earlier.
The bank is also expected to deliver a bumper first-half dividend of $2.09, well above the $1.75 interim payment a last year.
CBA reports after rival ANZ last week provided a December quarter update showing robust credit growth and a decline in impaired assets, despite the sharp increase in interest rates from May through to 2022’s end.
Investors and analysts will also receive a December quarter update from National Australia Bank on Thursday, following CBA’s results, while Westpac provides quarterly data on Friday. CBA has a June 30 end while its main rivals rule off their financial year on September 30.
Analysts and investors will closely monitor what CBA chief executive Matt Comyn has to say about the outlook for credit growth and loan losses as the economy markedly slows. They will also likely seek hints on what the bank expects for net interest margins – what banks earn on loans less funding costs – in the lead-up to June 30.
Against the backdrop of a 7.2 per cent rally in CBA’s stock this year, and the premium the bank trades at relative to its peers, there are no analysts recommending CBA as a “buy”, according to Bloomberg. Some 13 analysts rate the stock a “sell” and three a “hold”.
Ethical Partners Funds Management investment director Nathan Parkin highlighted that few large ASX stocks garnered no buy ratings, pointing to two examples of Fortescue Metals Group and plumbing firm Reece.
“The (CBA) sentiment is negatively skewed so it (the profit result) has the potential to surprise in that sense,” he said.
Mr Parkin noted CBA had a “tight focus” on strategy that had typically delivered a “better set of outcomes” versus its peers, so in that regard a valuation premium was warranted.
“It has had less share issuance than any other major bank over a decade,” he added.
On CBA’s prospects and those for the sector in the near-to-medium term, Mr Parkin said there were challenges on the horizon around fiercer competition for deposits and the risk of notably higher loan losses.
“I would think that banks would be at pains to say margins are good, but there are pressures coming,” he added.
“The deposit competition is picking up but it probably hasn’t played out fully.
“We expect they’ll (CBA) put some collective provision in place just to be prudent.”
CBA’s shares had a record close at $111.15 earlier this month and finished Friday’s session at $109.95. The bank is the second best performer in the S&P/ASX Banks Index so far this year, behind ANZ, which has seen its stock rally 8.7 per cent.
CLSA analyst Ed Henning expects CBA’s interim cash profit to print at $5.19bn, helped by a sharp rise in the bank’s net interest margin.
“We anticipate NIM (net interest margin) tailwinds to continue in 1H23, with benefits from interest rate increases and the rotation from fixed to variable rate mortgages. We forecast a 1H23 margin of 2.12 per cent, a circa 25 basis point increase from 2H22,” he said.
“We are forecasting a $2.10 interim dividend slightly above consensus expectations of around $2.09.”
Morgan Stanley analyst Richard Wiles is even more bullish on CBA’s profits and interim dividend.
“So far, CBA has completed about $1.8bn of the $2bn on-market share buyback, and we don’t expect a new buyback to be announced at the result. However, we forecast a large dividend increase to 215c, which assumes a circa 68.5 per cent payout ratio after adjusting for a ‘normalised’ loan loss,” he said.
Morgan Stanley expects CBA to report an interim cash profit of $5.39bn, amid still solid credit growth. Mr Wiles anticipates CBA will book expense growth of 4.5 per cent half-on-half, excluding customer remediation and one-off items.
Citigroup’s Brendan Sproules expects CBA’s bad and doubtful debts over its first half to amount to $402m, or 17 per cent lower than consensus estimates.
“We expect (the) asset quality to remain benign,” he said.
Citigroup is, however, pencilling in a CBA interim dividend of $2 per share.
Last month, Goldman Sachs analysts tipped the nation’s banks would benefit from a 20 per cent jump in earnings this year. They estimated the sector would post combined 2022-23 cash profits of $35.5bn. Goldman flagged banks would benefit from rate hikes, but they would then confront spluttering growth in 2024, as home lending slowed and competition for deposits intensified.
The big four banks reported bumper 2022 results with combined cash profits printing at $28.5bn, the highest level in four years.
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