The Commonwealth Bank, Australia’s biggest bank and largest company by market capitalisation, has increased in value on the ASX by almost one-quarter since October.
Investors love all the banks at the moment but the Commonwealth’s share price has hit record highs over the last week and currently sits around $92.3, or 24.5% up, giving it a market cap of about $150 billion.
At 16 times the expected annual earnings of $9 billion, that’s expensive. But investors like the high yields, quality of the flowing tax-paid dividends, and are betting the Commonwealth will star when it announces its first half results tomorrow.
Banks in general are having good time of it, with their businesses dominated by low risk and profitable home loans and a falling default rate.
David Ellis, head of banking research at Morningstar told Business Insider:
“It should be a pretty strong performance across the board. We’ll see solid revenue growth. I am hoping cost growth will trail revenue growth, what they call in the banking world positive jaws. And we’ll see benign bad debt. And solid lending growth, with business lending recovering, and strong deposits. Most of the lending growth is being funded by deposits and wholesale funding costs have been coming down the last six months.”
Here’s what to look for:
Cash profit – Analysts expect a rise of between 9% and 10% for the six months to between $4.55 billion and 4.6 billion. Compared that to the full 2014 year result of $8.68 billion for the full 12 months to June last year.
Interim fully franked dividend: $1.97 to $2 a share, up from $1.83.
Dividend yield: This depends on the share price and the above dividend. But should be around 4.5%.
Return on equity (cash basis): An improvement above 18.7%.
Group cost to income ratio: Running at 42.9% but should improve on tight cost control.
Customer deposits: Currently at $439 billion, or about 64% of the bank’s total funding. This reduces reliance on wholesale markets offshore. Compared to the other large Australian banks, CBA has the highest proportion of household deposits at 29%.
The ratings agency Moody’s says the bank’s asset quality benefits from its focus on the domestic market and on residential mortgage lending.
Australian mortgages are about two-thirds of Commonwealth’s gross loans.
“Our central scenario remains for stability in asset quality in the housing market,” says Moody’s. “We also note loan-to-value ratios of banks’ mortgage portfolios are at a cyclical low (the current dynamic average loan-to-value ratio for CBA is 48%).”
And Commonwealth’s corporate business is of a high quality across diversified industries.