CBA share price: revisiting the fundamentals before H1 earnings

We examine some the Commonwealth Bank of Australia’s key fundamentals before the bank reports its half-year results this week.

The Commonwealth Bank of Australia (ASX: CBA) represents both Australia’s largest bank and its best performing over the last year.

CBA share price: Q1 results revisited

Since the biggest of the big four reported its Q1 FY20 results on 12 November, the CBA share price has trended up.

Over the last year it’s done even better, rising ~14% in that period. By today's afternoon session the CBA share price traded around the $84.32 mark.

Around these price levels, CBA trades at a lofty valuation, especially when compared to other members of the big four.

Specifically, and according to recent research from Morgan Stanley, CBA is currently trading at ~17.2x forward earnings. By comparison, ANZ currently trades at ~12.2x forward earnings, NAB ~12.5x and WBC ~13.6x.

Maybe explaining this valuation discrepancy, CBA’s latest quarterly release indeed looks to have excited investors, with the bank reporting consistent volume growth, an increase in earnings and a good CET1 ratio.

Specifically, as part of its Q1 results, the bank noted that home lending rose 3.5%, household deposits had increased 10.4% and business lending (BPB) was up 2.8% – on a quarter-over-quarter basis.

Surprisingly even, when considering the current low rate environment, CBA's net interest income came in 3% high during Q1, attributable to lower basis risk and the aforementioned volume growth.

Non-interest income also rose in Q1 – up 7%.

The bank also posted stronger unaudited cash net profits of ~$2.3 billion in Q1 (from continuing operations), representing a 5% increase, when factoring in the exclusion of notable items.

The bank also remained above APRA's unquestionably strong threshold during the quarter, touting a CET1 ratio of 10.6%.

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Will CBA beat or miss current expectations?

Looking back at the research commentary from Citibank and UBS following CBA’s Q1 results, we previously wrote:

‘Citibank pointed out that it expected the bank’s net interest margin (NIM) to be broadly flat in the second quarter of FY20, even though margins were stronger in the quarter just passed.’

Moreover, UBS, though impressed by CBA’s Q1 NPAT performance, ‘also noted that caution should be taken by investors, pointing out that Q1 is typically seasonally strong for the Commonwealth Bank of Australia.’

Such thoughts look to be well reflected in the current analyst consensus, with CBA currently carrying 10 sell recommendations, five hold recommendations and zero buy recommendations, according to Bloomberg.

An average 12-month price target of $75.30 per share (according to Bloomberg) may also suggest some downside for investors at current price levels.

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