Commonwealth Bank of Australia (ASX: CBA) has reported its half year result to 31 December 2018, is the CBA share price a buy?
Commonwealth Bank of Australia or CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
Here’s the key CBA profit figures
CBA reported that its continuing operations cash net profit after tax (‘NPAT’) grew by 1.7% to $4.68 billion compared to the first half of FY18. On a continuing operations earnings per share (EPS) basis, EPS grew by 0.34% to 265.2 cents per share.
Statutory profit of $4.6 billion, which includes discontinued operations, was down by 6.3% compared to the same period last year.
CBA FY19 half year dividend
The dividend declared for this result is $2 per share, the same as last year. This represents a cash profit payout ratio of 74% including discontinued operations. Excluding discontinued operations it was a 75.4% payout ratio.
CBA CET1 Ratio
CBA needs to increase the level of capital that it holds so that it is “unquestionably strong” to meet APRA’s requirements for Common Equity Tier 1 Capital.
At 31 December 2018 CBA’s CET1 ratio increased to 10.8%.
CBA’s operating income and expenses
Australia’s largest bank said that operating income was down on a continuing operations largely due to a decline in the net interest margin (NIM), but also weaker ‘trading’ performance, removals of customer fee commissions and storm damage.
Operating income dropped by 1.9% to $12.4 billion
Operating expenses decreased by 3.1% to $5.29 billion as it benefited from not having as much risk, compliance or remediation costs in this period compared to last year.
CBA’s net interest margin (NIM)
The CBA NIM was 2.1% – a decrease of 4 basis points, 0.04%, compared to the second half of FY18. The NIM is important because it is the interest rate between CBA’s funding and what it lends money out at.
CBA attributed this decline due to home loan competition and higher funding costs.
CBA CEO comments
CBA CEO Matt Comyn said: “We maintained our focus on being best in digital and achieved leading rankings for the CommBank mobile banking app.
“Our transformation to be a simpler, better bank is well underway. We will continue to take action to address issues, earn trust and be a better bank for our customers.”
Is the CBA share price a buy?
This result shows that the operating conditions for CBA and all banks remain difficult. A decline in the NIM isn’t a good sign considering CBA has been increasing its interest rate for borrowers in out-of-cycle increases.
CBA does seem to have missed analyst expectations somewhat, but this is a complicated result with the Royal Commission costs, restructuring, asset sales and other factors.
Based on the pre-open share price of $73.60 CBA has a fully franked dividend yield of 5.85%.
CBA could be a decent choice for income, but I think profit growth and total returns will be sluggish over the next couple of years until everything from the Royal Commission is resolved including remediation.
I’d rather buy ASX shares that have better growth potential, such as the ones mentioned in the free report below.
ASX shares with better growth potential than CBA
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