Commonwealth Bank of Australia

Team Veye | 14 May 2020 ASX - CBA
Commonwealth Bank of Australia
Call Buy
Asx CBA

Commonwealth Bank of Australia

Commonwealth Bank of Australia (ASX: CBA) is a provider of financial services, including retail, business and institutional banking, funds management, superannuation, general insurance, broking services and finance company activities. The Company's segments include Retail Banking Services, which provides home loan, consumer finance and retail deposit products; Business and Private Banking, which provides banking services to relationship managed business and agribusiness customers; Institutional Banking and Markets, which services its corporate, institutional and government clients; Wealth Management segment, which includes platform administration, and general insurance businesses; New Zealand, which includes the banking and funds management businesses operating in New Zealand; Bankwest, which offers a range of deposit products, and IFS and Other Divisions, which includes the Asian retail and business banking operations (Profile source: Reuters)

From the Company Reports

CBA 3Q20 Trading Update

Commonwealth Bank of Australia (ASX: CBA) on 13 May 2020 reported its Trading Update For the quarter ended 31 March 2020. All comparisons are to the average of the two-quarters of the first half of FY20 unless noted otherwise.

  • Franchise and balance sheet strength – well placed to support our customers and the economy 
  • Additional loan loss provisions of $1.5bn for the potential impact of COVID-19 on our customers 
  • Strong operational performance in 3Q20, reflecting disciplined execution of our strategy 
  • Strategic progress in becoming a simpler, better bank for customers with majority sale of Colonial First State, sale of AUSIEX and receipt of final regulatory approval for PT Commonwealth Life divestment

 

(Chart source: TradingView)

 

3Q20 Overview

  • Unaudited statutory net profit of approximately $1.3bn in the quarter 
  • Unaudited cash net profit from continuing operations of approximately $1.3bn 
  • Additional credit provision of $1.5bn for forward looking adjustments in relation to COVID-19 
  • Flat operating income, with strong operational execution driving core volume growth, offset by the impacts of a lower cash rate 
  • Operating expenses (ex notable items) down 1% reflecting seasonal factors and ongoing simplification savings 
  • Headline operating expenses up 5% due to additional customer remediation provisions of $135m 
  • Strong funding, with Retail/SME deposits up $10bn in the month of March, deposit funding at 70%, NSFR 117% 
  • Excess liquidity, with March spot liquid assets at $188bn and a spot LCR of 159% (quarter average: 133%) 
  • Strong CET1 capital ratio of 10.7% after payment of 1H20 dividend and the COVID-19 provision (total of -111bpts) 
  • 1H20 interim dividend payments of $3.5bn paid on 31 March to ~830,000 shareholders

 

(Graphic Source – Company Reports)

Supporting its customers

  • >1 million calls and online requests for help, including an 800% increase10 in calls to our financial assistance line 
  • Repayment deferral requests on approx. 71,000 business loans, 144,000 home loans, 25,000 personal loans
  • Home loan repayments reduced to minimum – releasing up to $3.6bn to Australian households 
  • Over $555m of new lending from over 6,500 applications under the Government’s SME Guarantee Scheme 
  • Business lending rate cut by 125 basis points on all loans linked to the cash rate 
  • Merchant service fees waived for 60,000 business merchant facilities 
  • Fixed term owner occupied home loans interest rate reduced to 2.29% 
  • Term deposit interest rate increased 60bpts – 1.45% higher than the official cash rate (special offer to 26 April) 
  • Refunded $9.2m in credit card interest and late fees on ~150,000 accounts

 

Leading digital assets delivering support quickly and efficiently

  • New automated process for customers accessing home loan repayment deferrals 
  • ~250 million personalised in-app messages sent to customers regarding COVID-19 support 
  • Streamlined processes to fast track hardship requests, JobKeeper funding and deferrals 
  • 4 million visits to new online COVID-19 support page12 
  • 10.2 million peak daily logins to CommBank app and NetBank 
  • 150,000 new Benefits finder claims started, taking total claims since launch13 to over 500,000 
  • Digital wallet transactions up 17%14 to a record $1bn in March

 

(Graphic Source – Company Reports)

Provisioning further strengthened

  • A new $1.5bn forward looking adjustment has been raised in recognition of the potential future impacts of COVID19 on the economy. Total provisions now stand at $6.4bn, representing a coverage ratio of 1.65% to total credit risk weighted assets. 
  • Loan impairment expense was $1.6bn in the quarter, or 80 basis points of average GLAA, inclusive of the additional COVID-19 provision. Excluding this additional provision, loan impairment expense reflected sound portfolio quality. 
  • Consumer arrears were seasonally higher in the quarter, but lower year on year. Troublesome and Impaired Assets (TIA) were higher at $8.1bn, reflecting seasonally higher consumer arrears and continued pockets of stress in certain sectors, including discretionary retail and agriculture.

 

CBA announces agreement to sell 55% stake in Colonial First State to KKR

Commonwealth Bank of Australia (CBA) on 13 May 2020 announced that it had entered into an agreement to sell a 55% interest in Colonial First State (CFS) to KKR, a global investment firm with US$207 billion of assets under management as at 31 March 2020.

The transaction implies a total valuation for CFS on a 100% basis of $3.3 billion, which will result in CBA receiving cash proceeds of approximately $1.7 billion from KKR. The sale price represents a multiple of 15.5 CFS’s pro forma net profit after tax of approximately $200 million.

The transaction implies a total valuation for CFS on a 100% basis of $3.3 billion,1 which will result in CBA receiving cash proceeds of approximately $1.7 billion from KKR. The sale price represents a multiple of 15.5x CFS’s pro forma net profit after tax of approximately $200 million

COMMONWEALTH BANK OF AUSTRALIA (CBA)
Stock Overview
Sector Banks
Risk Low to Medium
Market Cap $107.72 billion
Daily average Volume 4,472,151
EPS (FY) $5.73
PE RATIO 10.6
Yearly Dividend Yield  7.08%
Target Price (s) T1 and T2 T1 $69.0 T2 $77.0
Stop Loss $57.0
Recommendation Buy
52 weeks High $91.05
52 weeks Low $53.44
Directors Mr Matthew Comyn
Non-executive Directors Mr Shirish Apte
Prof. Genevieve Bell

 

Veye’s Take

CBA’s strong capital position enabled it to deliver 1H20 dividend payments totalling $3.5bn to its ~830,000 shareholders during March. It has excess liquidity, with March spot liquid assets at $188bn. The Bank’s Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) were well above regulatory minimums. The Pillar 3 quarter average LCR as at 31 March 2020 was 133% (spot 159%) representing a significant excess to regulatory requirements. The Bank announced an additional credit provision of $1.5bn for the potential longer term impacts of COVID-19 further reinforcing its already strong provisioning and balance sheet settings. CBA has Strong funding, with Retail/SME deposits up $10bn in the month of March, deposit funding at 70%. CBA is trading about 3% below estimated fair value. CBA is good value based on its PE Ratio (10.6x) compared to the Australian market (15.1x). The Bank has high quality earnings. The stock has started trading in a narrow range. The momentum and MACD have turned positive. It can have the potential of a significant upside once it crosses its immediate resistance at $61.50. Veye recommends a "Buy" on “Commonwealth Bank of Australia” at the current price of $59.125


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