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Positive Outlook For Commonwealth Bank After Quarterly Results

Written by on May 21, 2013

Commonwealth Bank of Australia continues to deliver earnings of increasing quality and strength, with an unaudited third-quarter 2013 cash profit up 9% on thirdquarter 2012 to AUD 1.9 billion. Quarterly earnings are in line with our expectation, and our positive view is intact. Importantly, future dividends look increasingly sustainable. Core businesses are running well, with margins supported by the strong competitive position across key products including home loans, customer deposits and credit cards. Most importantly, the ability to reprice loans is intact, underpinning the bank’s competitive strength and narrow moat. We argue Commonwealth Bank is well managed, well capitalised, allocates capital efficiently and is leveraging key technological advantages.

Consistency is the key trademark for Australia’s largest bank by market capitalisation and the sixth largest bank in the world (excluding the massive Chinese banks). The brief update highlighted why we like the major banks. Commonwealth Bank continues to get the basics right: extracting meaningful earnings growth in a low credit growth environment, an outcome we have long argued to be very achievable. Moderate revenue growth is boosted by slightly better net interest margins, good levels of trading income, tight cost control and lower bad debts. Return on equity was not disclosed, but we anticipate the impressive 18.1% reported for first-half 2013 is not under any threat. Return on equity is well above major bank peers with Westpac Bank (ASX:WBC) at 16.1%, Australia & New Zealand Bank (ASX:ANZ) at 15.5% and National Australia Bank (ASX:NAB) at 14.7%.

Loan growth continues to be fully funded from customer deposits, asset quality remains sound and strong capital levels are supported by good organic capital generation. The bad debt expense of AUD 255 million for the quarter represents just 0.19% of total average loans. The solid underlying performance did not disappoint, particularly in retail banking, commercial banking, wealth management and New Zealand. Funds under administration and funds under management benefited from strong investment performance as global equity markets continue to recover. A standout was the AUD 1.1 billion of net flows with a second consecutive quarter of strong net flows to equities.

Commonwealth Bank is currently trading around AUD 72 per share and based on our forecasts will pay fully franked dividends totaling AUD 3.65 per share for fiscal 2013. Domestic retail investors are not interested whether Commonwealth Bank is more than twice as expensive (based on price-to-earnings and price-to-bookvalue ratios) as some high-profile U.K., European and US banks. Retail investors are not interested in relative return comparisons, they crave ‘absolute’ returns and sustainable income in Australian currency and, most importantly, Commonwealth Bank continues to deliver in spades. This is why it is one of the most ‘expensive’ banks in the world on a relative basis, trading at 2.7 times price-to-book-value and 15.3 times price-to-earnings based on our 2013 forecasts.


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