CBA result ahead of consensus but focus likely to be on weak Net Interest Margin

By Trevor Hoey. Published at Feb 15, 2017, in Features

The CBA has delivered an interim net profit of circa $4.9 billion, slightly ahead of consensus expectations. To cite a few brokers, Macquarie was forecasting a net profit of $4.87 billion while Bell Potter was at the top end of the consensus range at $4.9 billion.

The cash net profit implied year-on-year growth of 2% struck on a 6% increase in operating income.

Earnings per share were flat at $2.86, and the group declared an interim dividend of $1.99, up 1 cent on the previous corresponding period.

While the headline numbers were uninspiring, they weren’t below expectations and with cash return on equity (ROE) of 16%, the result is likely to be viewed as sound even though ROE for the previous corresponding period was 17.3%.

Net Interest Margin remains a worry

However, what could unsettle investors is the shrinkage in the Net Interest Margin (NIM), an important performance indicator and a pointer to costs of funding. This declined from 2.15% in the six months to December 2015 to 2.14% for the fiscal 2016 full-year.

The slide has continued with NIM for the first half of fiscal 2017 coming in at 2.11%. As is often the case, margins were impacted by higher funding costs.

With CBA only delivering marginal growth and trading on a forward PE of 14.7, a premium to the sector average of 13.5, perhaps it could be seen as fully valued at yesterday’s closing price of $82.63, particularly given this represents a premium to the 12 month consensus price target of $80.55.

While CBA is commonly viewed as a yield play rather than a growth investment, the recent spike in the share price has resulted in the implied yield coming back substantially to approximately 5% relative to consensus dividend forecasts for fiscal 2017.

By comparison, NAB is offering a yield of 6.4% relative to consensus dividend forecasts for fiscal 2017, and it is trading on a forward PE multiple of 13 based on yesterday’s closing price of $30.87.

It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.

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