CBA rallies 5% on earnings beat, issues $2bn share buy-back

Commonwealth Bank (ASX: CBA) will be ticking many boxes on Wednesday as it reported a first-half FY22 cash profit of $4.75bn, up 23% compared to last year and an interim dividend of $1.75 per share. 

The result topped broker cash profit expectations including: 

• Morgans forecasts of $4.32bn 

• Bell Potter and Citi forecasts of $4.38bn 

• Bloomberg estimates were $4.5bn

“Higher cash profits were a result of continued volume growth across the business in home lending, business lending and deposits, flat operating costs and significantly lower loan impairment expense due to the improving economic outlook,” CEO Matt Comyn said in a statement. 

Weaker net interest margins should come as no surprise after CBA’s September quarter update flagged “considerably lower” margins. 

CBA pointed the finger at “customers switching to fixed rate home loans, the impact of rising swap rates and continued pressure from home loan competition”. 

Dividends and capital management 

CBA intends to return excess capital to shareholders via an on-market buy-back of up to $2bn. This follows a $6bn buyback last year.

The buyback will reduce the bank’s CET1 capital ratio by approximately 42 basis points to 11.4%, but remains well above APRA’s requirements of 10.5%. 

An interim dividend of $1.75 per share will represent a yield of approximately 1.76% based off this mornings' opening price ($99.01).

The bank said it will continue to target a full year payout ratio of 70-80% of cash net profit. 

CBA shares will go ex-dividend on Wednesday, 16 February 2022. 

Looking ahead 

Comyn expects the Australian economy to "have a strong year in 2022 despite early challenges from the Omicron strain of COVID-19."

“The CBA Economics team’s forecast is for a modest monetary policy tightening cycle through FY23, with the first official interest rate increase forecast for August 2022.”

This could mark a key turning point for margins, which have been trending lower for the past decade due to progressively lower interest rates.