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CBA share price: what’s the outlook following first-half results?

We examine the key things investors need to know about the Commonwealth Bank of Australia's first-half results.

CBA share price Source: Bloomberg

Generally speaking, investors tend to be willing to pay more for the stock of quality companies. Such likely explains CBA’s lofty valuation relative to the other big four banks, currently trading at ~17.3x FY20 earnings, according to Bloomberg Data.

Indeed, when the Commonwealth Bank of Australia (ASX: CBA) revealed its H1 earnings today, they appeared to be a quality set of results. Investors seemed to think so at the very least, as the share price was bid 2.41% higher in the first 30-minutes of trade – to $86.7 per share.

Here, CBA revealed that loan growth continued to tick upwards, net interest margins actually rose (even in the face of historically low rates) and the bank’s dividend remained stable.

By comparison to CBA, ANZ currently trades at ~12.4x FY20 earnings, WBC ~14.5x and NAB ~12.7x.

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CBA share price: H1 fundamentals unpacked

Digging deeper into today's results, CBA reported first-half cash profits of $4.48 billion – representing a good beat on analyst expectations of $4.34 billion, according to Bloomberg Data.

Better still, CBA reported a net interest margin (NIM) of 2.11%, representing an increase of 1 basis point, on a half-on-half basis. CBA attributed this uptick to lower basis risk and higher asset pricing.

In saying that, as analysts have been predicting for some time now, CBA did today warn that 'the lower cash rate will continue to impact NIM as the benefits of equity and deposit hedges run off.'

Quantifying this impact, the bank expects the lower cash rate to have a 4 basis point impact on Group NIMs in FY20 and a 4 basis point impact in FY21.

Moreover, operating expenses continued to rise during the half, hitting $5,429 million. The leading factors here were wage inflation as well as increased IT, risk and compliance costs.

In saying that, costs are down from the second-half of FY19.

Finally, the biggest of the big four reported that volume growth had continued to trend upwards in the first-half. Business lending rose 3%, home lending grew 4% and transaction balances increased 9% – on a half-on-half basis.

CBA dividend remains steady

Likely to the relief of income-focused investors, today CBA announced a fully-franked interim dividend of $2.00 per share.

CBA has now paid an interim dividend around the 198 cents to 200 cents mark since the first-half of FY15.

The bank noted that its core franchise 'strength continues to support consistent returns' and that the Board would be targeting a full-year payout ratio of between 70% to 80%.

The outlook

Speaking broadly of the current economic environment, CBA's Chief Executive Officer, Matt Comyn said:

'The Australian economy is underpinned by good long-term fundamentals. Our population continues to grow, we have a strong trade and fiscal position and a solid pipeline of infrastructure investment provides ongoing stimulus.'

Looking at the impact this macro-backdrop may have on the bank, Mr Comyn further said, we will:

'Continue to invest in innovation and growth to create new opportunities for our business and to deliver the best experience for our customers.'

The CBA share price currently trades at the $87.48 mark.

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