CBA preview - the outlook statement is absolutely key

CBA report FY16 earnings on Wednesday 10 August, most likely at 08:30 AEST.

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Source: Bloomberg

Our client flow has been quite nuanced of late, with an equal weight of buyers and sellers, despite the progressively bearish sentiment portrayed through the media.

Price action on the daily chart has started to show the bears getting the upper hand, with a sizeable gap lower on Wednesday and it seems price has really struggled to again break through the key $79 level. It seems the market is unprepared to pay up for CBA’s expected $9.825 billion in cash earnings in 2017.

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Key full-year earnings (consensus) estimates

  • Revenue - $24.97 billion
  • Cash earnings - $9.48b
  • Return on equity – 16.76%
  • Final dividend 222c (Full year 420c – payout ratio of 75%)
  • Gross margin – 2.06% (2H16 -2.05%)
  • Bad debt charge/average loans (%) – 0.2
  • Core tier 1 ratio (%) – 10.4%

Traders are likely to react to the full-year earnings numbers relative to these consensus estimates.

Key themes to follow

The market is expecting a fairly soft result and there seems little in the way of catalysts to really drive the stock higher. Underlying credit quality will be in focus and the analyst community expect the second-half bad debt charge around non-housing loans to increase a modest 20 basis points (or 0.2%). Margins will obviously gain some focus given the recent repricing in the standard variable rate (SVR), amid rising competition and an increase in funding costs. One suspects if CBA is going to rally on the earnings announcement then better than forecast margins and presumably a more compelling dividend will drive. Keep in mind that the analyst community see CBA’s dividend as sustainable and many even forecast a dividend of 428c by 2018.

Cost savings and capital adequacy ratios will also gain focus and investors will be looking to efficiency measures such as declining return-on-equity.

With the Reserve Bank of Australia cutting the cash rate to 1.50% and CBA passing on 13 basis points and increasing their term deposit rate the outlook of the business from CEO Ian Narev will be absolutely key. Traders and investors will also focus on any views Narev on the outlook for housing and any potential deterioration in lending volumes.

The risks seem to be biased to the downside, however the mitigating factor is that the market goes into the release expecting soft numbers.

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