Max Pacella
Investment Analyst
Equities
11 Feb, 2021

Yesterday, Commonwealth Bank (CBA:ASX) was the first of our major banks to report 1H21 results, firing the starting gun on what will be several weeks of news coming out of the largest ASX sector.

In light of this we thought we would take the opportunity to not only shed some light on the CBA results, but provide an outlook on the Australian financial sector for the months ahead. This will be based purely on those securities which fall under ‘Financials’ – sorry, Afterpay fans.

Commonwealth bank results

A quick summary of the financials from yesterday’s report (in AUD):

  • Cash profit from continuing operations: $3.89 billion (-11% y/y)
  • Net income: $4.88 billion (-21% y/y)
  • Interim dividend per share: $1.50
  • Net interest margin (continuing operations): 2.01% v 2.11% last year
  • ROE (continuing operations on cash profit basis): 10.5%
  • Revenue: $11.96 billion

Let’s break that set of numbers down into some key takeaways.

Firstly, revenue was better than expected, beating the street’s expectation of $11.8 billion, which represents a recovery of 2.4% on the previous quarter.

This figure alone is expected to provide CBA strong momentum going into the second half of FY21. This also bodes well as a sign of recovery in the financial sector in general, as many market participants have waited to use CBA’s results as a litmus test for other banks.

Lending showed strong growth in 1H21. Home lending grew 5.6%, or 1.5x ‘system’ (the average rate of the banking system nationally) and Business lending grew at 7.4% or 3x ‘system’.

There’s mixed commentary about what the market was expecting for CBA’s dividend, with the general consensus being around the AUD 2 mark. This below-expectation result is likely to hurt the company from a ‘value stock’ exposure perspective, though this will largely depend on the indicative dividend yields announced by the other three majors later this month.

The credit quality or ‘CET1’ ratio – measuring the bank’s free capital against its risk-weighted assets- was strong at 12.6%, beating consensus of 12.25%.

Overall, the results marginally beat market consensus, and the improved credit quality and above-expectation revenue recovery should paint an optimistic outlook for the market going into the next half.

Source: Bloomberg


CBA has made a solid recovery and briefly exceeded pre-COVID levels earlier this month. CBA:ASX closed at AUD 86.12 yesterday, just below Feb 2020 levels.

Calendar for other majors

Below are some key dates for the other three major banks – keeping in mind that ANZ, WBC and NAB operate off a different financial year than CBA – using 30 September as their EOFY, rather than 30 June.

16 February 2021NAB First Quarter Trading Update
17 February 2021Westpac Pillar 3 report (date subject to change)
18 February 2021ANZ Pillar 3 report
31 March 2021Westpac Financial Half Year results announcement
5 May 2021ANZ Financial Half Year results announcement
6 May 2021NAB Financial Half Year results announcement

Sector outlook

Over this earnings season, most investors will at least take a glance at the major banks.

The sector holds particular esteem to Australians; if you want to run a small experiment, ask your colleagues and friends (who own stocks) how many own at least one of the ‘big four’, I’d be willing to say at least 70% will. The chances are probably higher than that, given 37.3% of the ASX200 is made up by the Financials.

And yet despite our respect and commitment to these stocks, the Financials sector has underperformed the overall ASX200 since 2018.

Source: Bloomberg

In the chart above, you can see Financials (green) have struggled to keep pace or outperform the broader ASX 200 (yellow) since late 2018, with particular divergence occurring in Q2-Q3 last year.

Going into 2021, we may see a recovery of the banking sector, both from a ‘rotation to value’ play and the perspective of our financial institutions on the global stage.

UBS analysts commented that over the last two months, Aussie banks have seen consensus earnings upgrades for the first time since 2015, played out against the backdrop of improving economic conditions. We have seen from CBA that credit quality is improving which, if followed by the other majors, will bootstrap confidence in the entire Financials sector as investors may overlook low dividends for the security of strong institutions.

It is uncontroversial to say that our banks are some of the best capitalised in the world.

Looking at the chart below, our ‘big four’ are amongst the top 6 banks in the world for CET1 ratios – given Australia’s handling of COVID and our relatively strong economic base coming into this year, this puts the sector in good stead for positive sentiment and growth.

Source: Commonwealth Bank of Australia, Morgan Stanley

Risks that investors should look out for are any impacts of decreasing/withdrawn government support – particularly the cessation of the Job Keeper Extension 2 program on the 28 March.

Short-term stock prices may also see headwinds if dividends do not meet market expectations of circa 3-4% for the 2021 calendar year.

But consensus amongst the analyst community is that even if dividend payout ratios are low (CBA’s $1.50 represents a 67% ratio), these figures should recover to around 75% for 2022.

What does this all mean? Possible growing pains ahead, with a favourable medium-term outlook.

Buy and hold

If there’s one consistent message the market is sharing about financials, it’s ‘buy and hold’.

Convincing Australians to buy the big banks, as a colleague put it, “is the easiest trade in the world”.

But despite a tumultuous 2020 and uncertainty around the remaining major results, CBA’s optimistic financials and a strong economic backdrop may give us hope for the future of financials.

If you already hold the majors, then there is a hopeful outlook ahead.

If you don’t, then there may not be the 30% gains from the low of last year in store, but sometimes you can’t beat a classic.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.