CBA earnings preview: Revenue growth, improved margins and higher dividend

Commonwealth Bank (ASX: CBA) is the only major bank reporting half-year results, and all eyes will be on whether the world’s most expensive bank can justify its valuation.

CBA shares have surged 40% over the past twelve months, despite earnings falling 2% in FY24. This lack of earnings growth has driven the stock's price-to-earnings ratio to nearly 29x, the highest on record since 2005.

During the same period, CBA’s average PE ratio has been just 15.4, with the 10-year average creeping up to around 17.

Setting the scene

"There should not be too many surprises in reporting season, given a stable operating environment," Morgan Stanley said in a note last month.

However, analysts expect improving revenue growth, strong cost control, solid credit quality, and ongoing capital generation to be key for supporting current trading multiples.

Some of the key themes they anticipate include:

• Interest rates and the operating environment remained stable in the second half of 2024, suggesting trends will mirror those of the previous reporting season

• Margins are expected to remain broadly flat quarter-on-quarter, with revenue growth improving

• No significant change in competitive intensity, with robust volume growth continuing

• Loan loss rates are expected to stay low, with any increase in loss rates under close scrutiny

• CET1 ratios should rise, but no new capital management initiatives are anticipated

Morgan Stanley estimates

Morgan Stanley expects CBA to report a result in line with expectations, with solid revenue growth pushing earnings expectations slightly higher.

CBA highlighted some improvement in revenue growth in its 1Q25 (September quarter) trading update and this momentum is expected to continue. Morgan Stanley expects the bank to report 4.5% revenue growth in the first-half of FY25.

In addition to revenue momentum, analysts expect the following:

• Margins are forecast to rise 8 bps half-on-half

• Underlying margin trends to be broadly stable vs 1Q25

• Proforma CET1 ratio of 12.4% (vs. 11.8% in 1Q25)

• CBA should consider a further lift in the payout ratio as $1 bill buyback has not been active

• Expect management commentary to be balanced, with references to ongoing competitive intensity and an uncertain macro environment

1H25 preview

Morgan Stanley's forecasts are a little more bullish than consensus. The below figures are looking for 1H25 cash profits to rise 2.7% year-on-year and up 7.0% compared to the previous half.

Commonwealth Bank 1H25 Morgan Stanley (MSe) and consensus forecasts | Source: Morgan Stanley (Jan-25)

Morgans forecasts

Morgans does not expect the first-half result to explain the recent strength in the share price.

"We’re targeting circa 5% sequential growth in cash EPS, based on 3-4% average lending growth, decline in non-lending assets and credit impairment expensing, and higher net interest margin and costs," the broker said in its February Reporting Season report.

The analysts have taken a conservative stance on dividends, expecting the bank to keep its interim dividend flat, contrary to consensus expectations of a slight increase.

"After accounting for the dividend, we estimate CBA will have approximately $2.65bn of excess capital. However, it lacks sufficient franking credits to pay a special dividend while maintaining 100% franking of its ordinary dividend," the analysts noted.

As part of its FY24 result, CBA announced an on-market buyback of up to $1 billion in shares. However, the bank has repurchased less than $20 million worth of shares to date, suggesting that management may view the current share price as too high for the buyback to be value accretive.

Given this, Morgans notes that "CBA is constrained in its ability to release excess capital to shareholders," and advises to "look for comments on how it plans to deploy this excess capital, potentially into growth avenues."