Commonwealth's reporting numbers paint a mixed picture

Commonwealth's reporting numbers paint a mixed picture

The largest listed ASX company, the Commonwealth Bank (CBA) reported its results recently and they paint mixed picture.

On the one hand, CBA saw its cash profit decline 1.9% relative to the prior corresponding quarter but on the other, its return on equity was a healthy 14.5% even after including a 1.2% provision for any possible AUSTRAC penalty.

In line with APRA recommendations, CBA is working to reduce the number of new interest only loans that it issues and in the December quarter the percentage of new loans issued that were interest only was just 21%, well below the 30% maximum recommended by APRA.

Furthermore, CBA has been reducing its exposure to apartment developers as the large supply of new apartment buildings due for completion in the next two years has analysts worried that there will be an oversupply in apartments. As a result, CBA’s apartment development exposure has been reduced by 23% over the past year.  

The AUSTRAC case is ongoing which is related to CBA’s failure to correctly report certain high value transactions. The final AUSTRAC report is due by 30 April 2018 but at this stage it appears to have been more of a technical error and there is no evidence of misconduct or unethical behaviour.

This is much more forgivable from the point of view of customers and therefore the reputational damage should not be too great from this.

The Royal Commission into the banks is also ongoing with an interim report expected by 30 September 2018 although the final report isn’t due until February of next year.

The banks, and especially CBA, have been working hard to improve their image amongst consumers. For example, CBA no longer charges ATM withdrawal fees and has moved its call centre to a local location. CBA will continue its efforts to improve its image although in the recent past the bank has managed to stay out of the headlines which is definitely a positive development relative to 2017.

The announcement of the Royal Commission has given journalists less fodder to continue raising the threat of this and although the AUSTRAC investigation is ongoing, it is no longer a newsworthy event (for the most part). This reduced focus on public relations should allow CBA to get back to managing its business.  

CBA has raised its dividend slightly to $2.00 (relative to the Feb dividend in 2017) which went ex on 14 February.

Although appreciation in the CBA share price has been relatively lacklustre over the past couple of years the company has managed to pay a stable dividend throughout this period. This is one of the reasons we are happy holders of CBA stock in our Rivkin Blue Chip Strategy.

Overall, we don’t expect a huge amount of profit growth out of the banks at the present time although we are confident that a solid set of results will allow them to maintain their attractive dividend payments.

The main risk for CBA (and the other banks for that matter), in our view, is the possibility of falling national home prices reducing the value of new mortgage demand.

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