Before the Commonwealth Bank of Australia (CBA) reports their latest set of results during Australia’s upcoming earnings season, take a look back at our analysis and summary of the company’s recent operating results. 

The piece below was originally published in our ASX 2023 Playbook: What’s your next move – during the start of 2023. 

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CBA reported A$5.2 billion in interim profits as the bank continues to dominate home lending

CBA posted runaway results during February 2023 earnings season – reporting double digit growth across its earnings and the bank’s all-important dividend.

Earnings rise, rates rise

As part of CBA’s interim 2023 results, the bank reported strong profit growth: statutory profits were up 10% year on year to A$5,216 million, translating to earnings per share of A$3.04. Bolstered by rising interest rates, CBA’s net interest margin rose 23 basis points, on a half on half basis, to 2.10%. Earnings growth in the period was driven by an increase in the bank’s net interest income, which rose 19% half on half to A$11,637 million – as the bank benefitted from a higher interest rate environment and saw volume growth across its suite of products, including home loans and business loans.

What to watch for:

Given its impact on bank earnings, investors should pay attention to the official RBA cash rate – which at March 2023 – stood at 3.60%. The RBA kicked off a dramatic rate hike cycle in 2022 in response to rising inflation.

Interim dividend +20%

CBA maintained a shareholder friendly view with regards to its dividend, declaring a fully franked interim dividend of A$2.10 per share as part of its half year results. That represents a 35 cent or 20% increase year on year from the last interim dividend paid and is equal to a 69% payout ratio.

Why it matters:

For income focused investors, CBA’s commitment and consistency to its dividends will continue to be an attractive and potentially important factor in retaining and expanding its shareholder base.

Home lending leader

CBA continued to demonstrate its position as Australia’s leading bank – particularly in regards to its home lending business. The bank controls 25% of Australia’s entire home lending market – with its nearest rival controlling 20%, and the remaining two controlling 14% and 13%, respectively.

What to watch for:

Investors should continue to monitor CBA’s home lending market share given the backdrop of an increasingly competitive home loan market, with 60% of Australian borrowers, according to Mozo research, considering neo-lenders over the traditional big four banks. This market leadership further came through in CBA’s top line results, with the bank’s operating income climbing 12% year on year to A$13,593 million.

Why it matters:

CBA’s scale might give the bank flexibility to provide its services at lower cost – either allow it to further entrench existing customer relationships or attract new customers.

Best-in-class efficiency

Beyond its dominant home lending market share, CBA reported a 80 basis point bump (half on half) in its return on equity (ROE) – taking first half 2023 ROE to 14.1%. As with its lending market share dominance, CBA continues to outperform its banking peers in terms of ROE – with its closest rival’s ROE coming in at 12.1%, and the remaining two banks having ROEs of 10.8% and 6.3%, respectively.

Why it matters:

ROE provides investors insights into the profitability and the efficiency at which a company is able to generate those profits. In this sense it can also be used as a quantitative gauge into the execution ability of a company’s management team. CBA’s market leading ROE might also explain why the company continues to trade at premium – in terms of its PE ratio – to its big four peers.

CBA outlook: key points

Speaking to the broad market outlook, CBA CEO – Matt Comywn – said:

“The Bank remains well provisioned and capitalised to continue to support Australian households and businesses. We are investing in our business to reinforce our customer propositions, extend our digital leadership and keep our customers safe from increasing frauds and scams.”

What to watch for:

On the dividend front, the bank noted that it ‘will continue to target a full year payout ratio of 70-80% of cash NPAT and an interim payout ratio of ~70% of cash NPAT.’ Income focused investors should watch out for any changing commentary around CBA’s dividend and in particular Board commentary in regards to the dividend target payout ratio.

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