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Why I prefer other banks to CBA

Paul Rickard
Thursday, August 09, 2018

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New CommBank CEO Matt Comyn rolled out his strategy yesterday to “become a simpler, better bank for our customers,” which prioritises simplification of CommBank’s operating model and processes, leading in retail and commercial banking and being the best in digital.

“Banking 101” some might call it.

Apart from digital, where CommBank clearly has the lead, the strategy could have been developed for almost any bank in Australia. It is almost identical to the ANZ and NAB strategies. Westpac, which is hanging onto its wealth management businesses and is a stronger proponent of a multi-brand model in retail, is looking somewhat distinctive.

Gone or going at the CBA are wealth management (Colonial First State and CFS Global Asset Management), most financial planning channels, life insurance in Australia and New Zealand, mortgage broking and TymeDigital in South Africa. Under review are general insurance and CBA’s banking businesses in Indonesia and Vietnam. 

The challenge for Comyn and his leadership team with this strategy is where does the growth come from? When the area of operation is just Australasia, the focus is traditional  banking, this market is an oligopoly where market share gains between the major players occur at the margin, and the Government is supporting new entrants through Fintech and open banking initiatives, it is hard to grow revenue. In fact, maintaining revenue will be challenging.

To grow earnings, outright cost reduction becomes increasingly important, and interestingly, Commbank specifically identified this as a key goal. It also called out ‘data and analytics’ and ‘innovation’ as supporting capabilities.

So, how much progress is CommBank making with cost reduction?

Looking at yesterday’s full year profit result, the answer to this question is “a work in progress.” Operating expenses in the shorter second half were up 2% on the first half from $5.74bn to $5.86bn, and for the full year excluding one-off costs such as the $700m AUSTRAC penalty, up 3.1% on 2017.

A fair chunk of the increase in operating expenses was due to elevated risk and compliance costs, a software impairment in the Institutional Bank and software amortisation, but offsets also occurred because bonuses and staff incentives were slashed. In fact, total staff numbers increased across the year from 45,614 FTE (full time equivalent) to 45,753 FTE in 2018.

Fully implementing the recommendations of APRA’s Governance Review and others expected to arise from the Royal Commission means that CBA will have its work cut out to obtain meaningful cost reduction in the near term. Hence, it is viewing cost reduction as a medium-term priority.

But it starts behind the ANZ and NAB who are both making cost reduction their number one goal, and shareholders will be expecting CBA to do more on this front, faster.

Overall, CBA’s profit result for the year of a cash NPAT of $9.23bn, up 3.7% when “one-offs” are excluded, was a little better than expected (or not as bad as the market had feared) and CBA shares rose on the day by 2.6% to $74.81.

Positives included:

·      Transaction account balances up 10.6% on the prior year, and customer deposits now contributing 68% of total group funding;

·      The net interest margin in the second half of 2.14% was only down 0.02% on the first half, notwithstanding the pressure in the short-term funding markets;

·      Most business units increased cash NPAT, with the Retail  Bank up 5%, the Business Bank by 4%, Bank West by 18% and ASB by 12%.

·      An increase in the final dividend from $2.30 to $2.31 per share. Small, but an important “statement” by the Board.

On the negative side:

·      A half-on-half profit decrease (second half vs first half) of 6.8% or $330m. Now, there are three fewer calendar days in the second half (which reduces revenue by about $150m), but this is only part of the explanation;

·      Market share in home loans fell from 24.8% to 24.4%, with home loan lending growth of 3.7% below the market (‘system’) growth of 5.6%. Business lending market share fell from 18.6% to 17.8%;

·      Home loans in arrears (over 90 days due) rose from 0.60%  of the total loan amount  to 0.70%, and;

·      The disappointing performance of the Institutional Banking & Markets division, with profit down 14% due to lower trading revenue and the write-off of a lending system.

Bottom Line

A workmanlike result, but rather because expectations had been hosed down. CBA had been sold down on the ASX ahead of the result, so its performance yesterday was more about “reversion to the mean” than “a huge vote of confidence.”

As the bank trading at a premium to the other banks (highest multiple of earnings and lowest dividend yield), hard to recommend in the absence of demonstrable evidence that its strategy can grow earnings by cutting costs and/or increasing revenue. For the time being, I prefer others such as the ANZ.

Published: Thursday, August 09, 2018

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