Tuesday 09 May 2017 by Company updates

CBA 3Q17 update – recurring sector themes


CBA leads the pack with a full year statutory net profit after tax tracking toward AUD10bn and globally comparable common equity Tier 1 ratio of 15.2%, or 9.6% under APRA methodology. This note also discusses four recurring bank themes

With an earnings run rate tracking toward a full year statutory NPAT of AUD10bn (AUD2.6bn in 3Q17), and a globally comparable CET1 ratio of 15.2% (APRA CET1 9.6%), there was little to be concerned about in CBA’s 3Q17 trading update released this morning.

Themes highlighted in ANZ, NAB and Westpac’s H17 results released recently remain relevant to CBA and are summarised as:

  1. Significant uncertainty on future regulatory capital requirements – The majors have good scope to meet higher requirements if APRA increases minimums due to solid organic capital.
  2. Strong cash earnings, underpinned by continued low impairment expenses (CBA bad and doubtful debts/GLAs charge was just 11bps 3Q17) and well provisioned balance sheets.  That said, Western Australia remains the outlier with arrears continuing to deteriorate and is unlikely to abate in the near term. This highlights to RMBS and less diversified bank investors to avoid over concentration to stressed markets. Asset quality continues to benefit from low interest rates and high employment levels.
  3. Rebalancing loan books to maximise capital efficiencies – Group Credit risk weighted assets (RWA) continue to fall as banks progressively migrate away from high RWA corporate lending (100%) to lower RWA mortgages (25%). CBA 3Q17 reduced corporate CRWA by 6.7%, which net of mortgage lending growth, resulted in total RWA down 1.5%. Importantly, the major banks still face headwinds from 1 July 2016 changes to RWA for mortgages which are being implemented progressively.
  4. NIMs continue to be squeezed as banks manage higher funding costs (particularly irregular and irrational price driven competition in term deposits) while the benefits of recent out of cycle repricing of loans books are expected to have a lag affect over the next half year. While 3Q17 NIM was not disclosed by CBA, we recall the 3bps sequential decline in H17 NIM and note comments from management that the margin was “slightly lower” in 3Q17.

Overall, the Australian banking sector, led by the four majors, is realigning their operations into more agile businesses that are increasingly focused on capital efficiency and margin preservation as they face an evolving regulatory environment that promises earnings and capital headwinds. In this context, we expect all the majors will need to issue contingent capital securities (AT1 hybrids and Tier 2 bonds) toward the end of calendar 2017.

Some key charts from the CBA 3Q17 trading update are below:

Source: Commonwealth Bank