Commonwealth Bank pulls away from Westpac, ANZ and NAB

Commonwealth Bank is bigger than ANZ and Westpac put together, and has made advances in key areas. Picture:Bianca De Marchi

In exceptional circumstances, Commonwealth Bank has moved into a league of its own. This week’s results show a bank sitting perfectly poised for the rebound in Australia’s wider fortunes.

You may already know CBA is the biggest of the big four banks with a market capitalisation of about $155bn, but it might not be fully appreciated that it is now bigger than ANZ and Westpac put together.

The headline result of a 10 per cent drop in cash profits over the last six months told us little. It is the key numbers under the hood that really point to where this bank and its 880,000 shareholders are heading.

Keep in mind, too, that those shareholders have had to endure an extended period in the doldrums, with the CBA share price — at close to $87 — still below where it was this time five years ago, when it hit $90.

Indeed, all the major banks are set to benefit from the useful combination of an economic rebound mixed with low funding costs.

But as any good stock analyst will tell you, the time to take a deep look at a stock is not when it bangs out great profit numbers, rather it is the months before when the seeds are sown.

We don’t have numbers yet for the other three banks. They will all report in the weeks ahead. But looking across the interim numbers released by CBA this week we see advances being made in key areas, while potential bad debt ­issues that have loomed over the share price begin to recede.

Perhaps the number that jumps out most strongly is the stranglehold CBA now has on the lending market — remember, it is already the biggest bank yet it has managed to grow its home loans book at 1.5 times the pace of the wider banking system and business lending at three times the pace.

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Comparing the last six months to the corresponding period in 2020: home lending across the bank grew by 32 per cent and credit card lending was up 28 per cent. (The bank has also made sure it has a seat at the table in the “buy now, pay later game” with a stake in Klarna.)

The second number that pops up relates to broking and how the bank has again captured a slice of the action despite its scale. As a new wave of investors rushed into the sharemarket after the crash last March, the value of trading at CommSec doubled to $110bn.

Moreover, the number of new customers in just six months went up by 230,000 — to put that number in perspective, the entire shareholding population in Australia is thought to be about 6 million. (The 230,000 included 170,000 in the Pocket product, which focuses exclusively on exchange-traded funds).

That’s the good part about the good news. Perhaps more interesting is the good part about the bad news — fears of a blowout of bad debts as some householders who had deferred payments in the crisis faced deadlines in March.

According to CBA the number of people on the books with deferred mortgages is now down to 25,000, from 107,000 only four months ago in September — this is a hell of a drop in related loans from $39bn to $9bn.

The issue of poor-quality loans in the residential market is by no means off the table. In fact, it’s worth noting that a portion have moved to interest-only payments, which may just be pushing a problem down the track.

Total loan impairment provisions were also increased over the term. But the wider fear that there was a time bomb inside the bank’s loan books is, shall we say, defused.

For investors, the issue is how will all this reflect on the stock? On hard numbers, the CBA share price is already overvalued according to consensus forecasts, which sit at $80.50, while the stock is moving up steadily and is now at $87.36 after beginning a ­rebound in the middle of last year.

You have to wonder if these consensus price forecasts will now move higher — certainly, some of the more recent targets post-­results are doing just that: UBS upped its target to $90 this week.

A key point is that CBA — even if the stock price did nothing for the rest of the year — is now back paying $1.50 a share every six months, a dividend yield back around 4 per cent. And you can push that higher in take-home terms with 100 per cent franking.

For those who held on while the bank struggled through a ­series of challenges, particularly at the Hayne royal commission where it looked as bad as any of its rivals, this is payback time.