CBA full-year earnings: a worrying deterioration in asset quality

It’s steady as she goes at CBA and, to the investor holding CBA for income, boring is good.

Source: Bloomberg

In terms of the CBA’s financial performance, we can see that cash earnings were slightly below expectations at $9.50 billion (+3% yoy), although earnings did fall 3% in the second half. Net interest margins (NIM) fell two basis points in the second half to 2.06%, largely in line with forecasts, impacted largely by increased funding costs and competition. Return on equity (RoE) printed 15.7% in 2H16, which was a touch under expectations and marks a clear decline from 1H16.

CBA paid a final dividend of 222c, which again was in line with forecasts and represents a payout ratio of 76%. CBA has a strong capital position at 10.6% and this will certainly please investors.

An area which needs increased focus is the bank’s asset quality. On one hand, bad and doubtful debts in the second half of the financial year were clearly lower than forecast by analysts. However, new impaired assets were up 22% in the half, gross impaired were up 12% and the level of ‘troublesome loans’ in the commercial space gained 13%. The commentary from the bank certainly hasn’t suggested investors need to be overtly concerned with management stating ‘more of the same’ is the most likely scenario, with ‘some downside risks’.

So on the whole, nothing really in the result to inspire, but again nothing to really suggest shorting the name with any real conviction. The deterioration in asset quality and soft composition of the underlying result is concerning, but one suspects the market went into this result expecting far worse, hence there is no real selling in the name.

The real issue here is that those who have bought CBA for its 5.5% yield are looking purely at the earning profile and sustainability of the dividend. Neither are suggestive that the income story is over and therefore the investment case remains. However, one has to be modestly concerned about the asset quality and the read through to the broader economy.

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