Market likes Commonwealth Bank’s revenue recovery

Analysts applaud Commonwealth Bank’s balance-sheet strength, but say capital management initiatives won’t occur in the short-term.

CBA CEO Matt Comyn. Picture: Adam Yip

Analysts have warmed to a revenue recovery from Commonwealth Bank and applauded its balance-sheet strength, but say capital management is unlikely to occur in the short-term.

Chief executive Matt Comyn unveiled a 10.8 per cent decline in cash profit to $3.89bn for the December half-year, as he raised impairments compared to a year ago and expressed cautious optimism about the outlook.

UBS, however, highlighted a better-than-expected, four per cent lift in revenue in the three months to December.

“The revenue recovery appears to be broad-based, with stronger lending volumes and a bounce in the net interest margin driving a 2.4 per cent recovery in net interest income in the second quarter,” analyst Jon Mott said.

“Better trading income, a rebound in merchant fees post-COVID and stronger CommSec revenue drove a nine per cent rise in second-quarter fee income.”

Mr Mott said this highlighted the strong leverage the banks had to an economic recovery.

While cautious about assuming a longer-term trend, and conscious of the drag from near-zero interest rates, Mr Mott said the revenue environment was better than previously imagined.

CBA shares rose on Thursday in a flat overall market.

On the prospect for capital management initiatives due to its $10bn surplus over regulatory requirements, CBA cited the need for greater certainty about the domestic economy, ongoing improvement in credit quality and risk factors, and guidance from the prudential regulator.

Mr Mott said he expected a $10bn buyback, up from $8bn, with the 2021 annual result.

While upgrading his 2021 earnings per share forecast by two per cent, and six per cent and 10 per cent in the following two years, UBS said this was already factored into CBA’s share price.

The bank is valued by the market at 2.2 times its book value.

Citi analyst Brendan Sproules said the half-year result was about four per cent ahead of consensus estimates, with revenue about 1.5 per cent more than expectations.

Mr Sproules said higher costs, inflated by a further customer remediation top-up, took the gloss off much lower bad debts compared to the preceding half-year.

“Headwinds for underlying costs are mounting, however, with growing investment spend, inflation, resumption of discretionary costs, and amortisation from completed projects,” he said.

“Aspirations of near-term absolute cost reduction now appear challenged.

“The quantum of capital available to be returned has increased to about $10bn with this result, but material buybacks could wait until the second half of 2022.”

Morgan Stanley analyst Richard Wiles said the result featured solid operating trends, sound credit quality and stronger capital.

Despite this, the investment bank persisted with an underweight recommendation.

“We think CBA‘s outperforming franchise, low risk profile, and capital management prospects are reflected in trading multiples,” Mr Wiles said.