Banks

CBA flags major abnormals ahead of Wednesday’s full year FY22 result

By Market Index
Mon 08 Aug 22, 11:31am (AEDT)
CBA Bank
Source: iStock

Key Points

  • CBA guides to $445m in one-off expenses pre-tax within its annual result
  • The bank posted a pre-tax $516m gain from the sell down of its 10% stake in Bank of Hangzhou
  • While earlier and larger rate rises and a steeper yield curve underpin a better margin recovery in the near-term, Morgan Stanley expects an eventual increase in deposit betas, more expensive wholesale funding, plus a weaker housing and mortgage market

Ahead of its full year annual result on Wednesday 10 August, Commonwealth Bank (ASX: CBA) has given the market a sneak peek into the one-off items (aka abnormals) that will impact its results for the second half of FY22.

The bank expects the impact of one-off items to be "broadly offsetting" on cash net profit" for FY22.

Specifics within today’s full year prelude include two key figures:

One-off expenses

Firstly, Australia’s biggest bank guided to $445m in one-off expenses pre-tax within its annual result.

The lion’s share of these second half abnormals (around 90%) relate to the acceleration of amortisation on certain capitalised software, while other provisions relate to changes in the group’s operating model.

The bank notes that software amortisation expense, excluding one-offs, is expected to be broadly flat in FY23.

Bank of Hangzhou sell-down

Secondly, a pre-tax $516m gain from the sell down of its 10% stake in Bank of Hangzhou was also recognised in the bank’s cash profit before tax and included within other banking income.

The sale, which was announced at the end of the financial year, pushed the bank’s CET1 capital ratio 35 basis points (bps) higher.

The bank advised investors that the remaining 5.6% investment in Hangzhou will now be treated as a strategic equity investment, “with gains and losses recognised within the statement of comprehensive income.”

In layman’s speak, that means the bank will no longer recognise its share of profits from Hangzhou as an associate within other banking income.

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CBA share price was up 0.52% at the open today.

 

What brokers expect

The bank’s share price is down -2.26% over one year.

Consensus on CBA is Moderate Sell.

Based on Morningstar’s fair value of $110.64 the stock appears to be undervalued.

Based on the seven broker that cover CBA (as reported on by FN Arena) the stock is currently trading with -12.8% downside to the target price of $88.47.

Overall, brokers analysts expect upward pressure on homeowners’ to lead to earnings gains for banks over the rest of the year.

Morgan Stanley sees a brighter near-term earnings outlook from robust volume growth, margin trends and sound credit quality. 

But due to high bank valuations and the possible hurdles thrown up by aggressive RBA hikes, the broker has cut its recommendation to Neutral from Overweight.

The broker’s target price lifts to $82 from $79 after raising its FY23 margin forecast by around 4bps.

Morgan Stanley notes while earlier and larger rate rises and a steeper yield curve underpin a better margin recovery in the near-term, “they are also likely to eventually lead to higher deposit betas, more expensive wholesale funding, a weaker housing and mortgage market, and greater recession risk.”

Meantime, while Jarden expects CBA’s headline net interest margin (NIM) to contract by 18 basis points to 1.9%, the broker expects the trend to start unravelling in the fourth quarter as the full brunt of May and June’s rate hikes start to kick in.

Ord Minnett expects second half cash net profit from continuing operations of $4.805bn, and a final dividend of $2.05 a share.

Given the dynamics for higher interest rates and deposit market rates, the broker expects commentary on the net interest margin (NIM) outlook to underscore the FY22 result on 10 August.

The broker’s Hold rating and $83.80 target are unchanged.

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