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Fundamental View
AS OF 15 Dec 2022CBA has a very strong franchise in Australia and is the leader in the retail market.
It has been the best managed of the Australian banks for many years and has outperformed peers. It lost some of its luster in the latter part of the 2010’s due to regulatory and compliance lapses amid charges of complacency, but has since improved into a better institution, with a particular focus on business banking.
Its capital and liquidity position is robust, whilst asset quality has generally been stable.
Business Description
AS OF 15 Dec 2022- Originally established by the Australian government in 1911, CBA functioned for part of its history as Australia's central bank until the establishment of the Reserve Bank of Australia in 1959. It remained under government ownership until the early 1990s after which it underwent a transformation from a bureaucratic public sector bank into a widely respected commercial organisation.
- Over the past twenty years, CBA has consolidated its position as the leading bank in Australia with a 24-28% share in household deposits and lending helped by its acquisition during the 2008 crisis of Bank of Western Australia.
- In New Zealand it owns ASB Bank, but otherwise has been selling non-core assets including its life insurance business.
Risk & Catalysts
AS OF 15 Dec 2022CBA’s financial health is closely linked to the Australian economy, in particular retail credit quality, mainly housing loans.
Earnings are under pressure from mortgage competition and lower-margin fixed rate loans, but the impact on the NIM should have bottomed in 2H22. Losses on housing loans have been minimal, but will increase within manageable limits given rising interest rates and falling house prices. The offsetting factor is a low unemployment rate in the mid 3%’s in Australia; this is not likely to increase by much.
Key Metrics
AS OF 15 Dec 2022| AUD mn | Y22 | Y21 | Y20 | Y19 | Y18 |
|---|---|---|---|---|---|
| Return on Equity | 12.8% | 11.7% | 10.5% | 12.7% | 14.4% |
| Total Revenues Margin | 2.2% | 2.3% | 2.4% | 2.5% | 2.7% |
| Cost/Income | 46.7% | 47.0% | 45.9% | 46.2% | 44.7% |
| APRA CET1 Ratio | 11.5% | 13.1% | 11.6% | 10.7% | 10.1% |
| International CET1 Ratio | 18.6% | 19.4% | 17.4% | 16.2% | 15.5% |
| APRA Leverage Ratio | 5.2% | 6.0% | 5.9% | 5.6% | 5.5% |
| Impairment Charge/Avg Loans | (0.0%) | 0.1% | 0.3% | 0.2% | 0.1% |
| Gross Impaired Loans/Total Loans | 0.3% | 0.4% | 0.5% | 0.5% | 0.4% |
CreditSights View
AS OF 15 Dec 2022CBA has for many years achieved superior returns through sound management of risks and costs while maintaining relatively high-profit margins. It has the leading position in mortgages and deposits, and is challenging NAB in business banking. The AUSTRAC penalty in 2018 damaged its reputation and remediation costs impacted earnings for a couple of years. The bank has sold a number of its non-bank business and equity investments to simplify and focus on its core businesses in the ANZ area. Strong mortgage market competition and higher wholesale funding has capped NIMs despite cash rates increasing. Business banking segment growth has been stellar and highly profitable. Asset quality is comfortable and capital is robust. It is our preferred name amongst the Aussie banks.
Recommendation Reviewed: March 01, 2023
Recommendation Changed: October 05, 2016
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