Commonwealth Bank (CBA)

Transcription

1 10 February 2016 Analyst TS Lim Authorisation Chris Savage Commonwealth Bank (CBA) Ordeal and triumph Recommendation Buy (unchanged) Price $74.20 Target (12 months) $83.50 (previously $85.50) Expected Return Capital growth 12.5% Dividend yield 5.7% Total expected return 18.2% Company Data & Ratios Enterprise value Market cap n/m $126,700m Issued capital 1,708m Free float 100% Avg. daily val. (52wk) $302.6m 12 month price range $ $96.27 GICS sector Price Performance Banks (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Strong underlying 1H16 despite the odds CBA s headline 1H16 results are as follows: (1) reported NPAT $4,618m (BP $4,784m, consensus $4,764m); (2) cash NPAT $4,804m (BP $4,770m, consensus $4,773m); (3) cash EPS 285cps (BP 287cps, consensus 285cps); (4) interim dividend 198cps fully franked (BP 202cps, consensus 198cps); (5) neutral Jaws pcp (BP neutral Jaws pcp); (6) ROE 17.2% (BP 17.2%); (7) CET1 10.2% (BP 10.2%, consensus 10.4%); (8) Group NIM 2.06% (BP 2.07%, consensus 2.10%); and (9) BDD charge $564m or 17bp of GLA (BP $519m or 17bp, consensus $522m or 16bp). CBA s 1H16 results were largely in line with expectations. Cash NPAT increased by 4% on a pcp basis to $4.8bn (+6% hoh), reflecting strong revenue growth (+6% pcp, +5% hoh) and cost discipline (+6% pcp, +3% hoh) the key ingredients in sustaining underlying profitability. Jaws was neutral on a pcp basis but improved to +2% in the last six months. The figure excluding FX was +1.2% on a pcp basis (5% revenue growth and 3.8% expense growth) and we expect this to be higher on an underlying basis. Underlying profit (excluding the BDD charge) improved by 6% on a pcp basis (also 6% hoh) to $7.2bn. The smaller difference of $186m between reported and cash NPAT is due to larger hedging and IFRS volatility, i.e. higher unrealised losses on economic hedges. CBA maintained its 198cps interim dividend (on a pcp basis, despite the dilution impact from its August capital raising) and its target dividend payout ratio of around 70% in the first half and around 80% in the second half. Price target $83.50, Buy rating maintained Our estimate changes reflect lower other income and higher BDD net of lower operating expenses. The net result is a slight decrease to cash NPAT and cash EPS across the forecast horizon of 2%. Consistent with lower EPS expectations, we have also trimmed the dividend estimates and the price target is slightly lowered to $83.50 (previously $85.50). Today s results highlight CBA s resilience and the availability of multiple value levers to pull in a challenging market Buy rating maintained. Absolute Price $100 $95 $90 $85 $80 $75 $70 $65 Feb 14 Jun 14 CBA Oct 14 Feb Jun Oct S&P 300 Rebased Earnings Forecast Year end 30 June e 2017e 2018e NPAT (reported) (A$m) 9,063 9,533 10,064 10,620 NPAT (adjusted) (A$m) 9,137 9,569 10,100 10,656 EPS (adjusted) (A ps) EPS growth (%) 5% 0% 4% 4% PER (x) P/Book (x) P/NTA (x) Dividend (A ps) Yield (%) 5.7% 5.7% 5.8% 6.1% ROE (%) 18.2% 16.6% 15.9% 15.6% NIM (%) 2.09% 2.06% 2.05% 2.05% Franking (%) 100.0% 100.0% 100.0% 100.0% SOURCE: IRESS SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 12 THAT FORM PART OF IT. Page 1

2 Ordeal and triumph Strong underlying 1H16 despite the odds CBA s headline 1H16 results are as follows: Reported NPAT $4,618m (BP $4,784m, consensus $4,764m); Cash NPAT $4,804m (BP $4,770m, consensus $4,773m); Cash EPS 285cps (BP 287cps, consensus 285cps); Interim dividend 198cps fully franked (BP 202cps, consensus 198cps); Neutral Jaws pcp (BP neutral Jaws pcp); ROE 17.2% (BP 17.2%); CET1 10.2% (BP 10.2%, consensus 10.4%); Group NIM 2.06% (BP 2.07%, consensus 2.10%); and BDD charge $564m or 17bp of GLA (BP $519m or 17bp, consensus $522m or 16bp). CBA s 1H16 results were largely in line with expectations. Cash NPAT increased by 4% on a pcp basis to $4.8bn (+6% hoh), reflecting strong revenue growth (+6% pcp, +5% hoh) and cost discipline (+6% pcp, +3% hoh) the key ingredients in sustaining underlying profitability. Jaws was neutral on a pcp basis but improved to +2% in the last six months. The figure excluding FX was +1.2% on a pcp basis (5% revenue growth and 3.8% expense growth) and we expect this to be higher on an underlying basis. Underlying profit (excluding the BDD charge) improved by 6% on a pcp basis (also 6% hoh) to $7.2bn. The smaller difference of $186m between reported and cash NPAT is due to larger hedging and IFRS volatility, i.e. higher unrealised losses on economic hedges. NIE increased by 6% on a pcp basis (+6% hoh) to $8.4bn, largely driven by strong volume effect (and stable rate effect hoh). While NIM fell by 5bp on a pcp basis to 206bp and the spread was roughly unchanged at 194bp, the more important factor in our view is the change in the six months to 31 December. At the Group level, the spread improved by 1bp and NIM was stable at 206bp with the difference being a 1bp lower free fund effect (impacted by a low rate environment). Group spread and NIM were favourably impacted by repricing in the Australian operations (spread unchanged pcp and +1bp hoh, NIM -2bp pcp and +5bp hoh). We note mortgage repricing in Australia only took place in November and there should be some tailwind from full repricing in the second half. The table below highlights the changes in spread and NIM in Australia after netting out a notional transfer price/charge. While the table indicates asset competition and a higher 90 day bank bill rate crimping the loan spread in 1H16, we expect some of this pressure to ease when the full mortgage repricing benefit takes effect. More surprisingly, the Australian division reported positive funding spreads compared with the substantial negative funding spreads at the time of the GFC (1H09). Table 1 CBA Australian spread and NIM analysis CBA (Australia) 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Average loan yield 7.21% 7.72% 7.65% 6.12% 5.85% 6.45% 6.80% 6.96% 6.70% 6.44% 5.95% 5.74% 5.41% 5.26% 5.12% 4.87% 4.60% Average deposit cost 4.80% 5.46% 5.42% 3.77% 3.48% 4.22% 4.41% 4.58% 4.35% 4.09% 3.56% 3.30% 2.95% 2.74% 2.65% 2.37% 2.10% Average other funding cost 6.45% 6.68% 5.94% 3.44% 3.53% 3.95% 4.61% 4.28% 4.42% 4.27% 3.67% 3.57% 3.05% 2.97% 2.96% 2.67% 2.26% 90 day BBSW 7.29% 7.81% 4.39% 3.25% 4.13% 4.89% 5.03% 4.99% 4.51% 3.49% 3.11% 2.79% 2.61% 2.69% 2.77% 2.14% 2.35% Loan spread -0.08% -0.09% 3.26% 2.87% 1.72% 1.56% 1.78% 1.97% 2.19% 2.95% 2.84% 2.96% 2.81% 2.57% 2.35% 2.73% 2.25% Deposit spread 2.49% 2.35% -1.03% -0.52% 0.65% 0.67% 0.62% 0.41% 0.16% -0.60% -0.45% -0.52% -0.35% -0.05% 0.12% -0.23% 0.25% Other funding spread 0.84% 1.13% -1.55% -0.19% 0.60% 0.94% 0.42% 0.71% 0.09% -0.78% -0.56% -0.79% -0.45% -0.28% -0.19% -0.53% 0.09% Net spread 3.25% 3.39% 0.68% 2.16% 2.97% 3.17% 2.81% 3.09% 2.44% 1.57% 1.83% 1.66% 2.02% 2.24% 2.28% 1.97% 2.59% Geographic spread 1.86% 1.72% 1.79% 2.04% 2.08% 1.99% 1.90% 1.99% 1.89% 1.81% 1.84% 1.98% 2.03% 2.05% 2.04% 2.03% 2.04% Geographic NIM 2.13% 1.99% 2.06% 2.21% 2.29% 2.18% 2.19% 2.31% 2.17% 2.10% 2.11% 2.20% 2.18% 2.19% 2.17% 2.10% 2.15% Page 2

3 Other banking income increased by 4% on a pcp basis to $2.5bn (unchanged hoh). While commissions and lending fees were up strongly (pcp and hoh) and in line with volume growth, these were offset by lower trading income (lower treasury earnings and unfavourable derivative valuation adjustments on a pcp and hoh basis, and lower asset sales and a loss on New Zealand earnings hedge on a hoh basis). Offsetting the latter and lower investment experience (impacted by market volatility) were strong performances in funds management (higher net FUA and FUM) and insurance income (new volumes, repricing and lower claims and lapse experience). Operating expenses increased by 6% on a pcp basis to $5.2bn (+3% hoh), driven by inflation-related SAW increases (+6% pcp and hoh) including the impact of a weaker A$, higher occupancy and equipment expenses (+4% pcp, +2% hoh) due to rental reviews and a weaker A$, and higher IT expenses (+20% pcp, +13% hoh) largely related to risk and compliance projects. These were offset by lower general costs (-2% pcp, -14% hoh) reflecting lower professional fees and non-lending losses. The cost-to-income ratio was unchanged at 42% on a pcp basis (1.1% improvement on a hoh basis) while the banking component improved from 39.3% in 1H15 to 39.0% in 2H15 and 38.6% in 1H16. Efficiency gains at Group level are also reflected in costs as a percentage of average assets (1.20% in 1H15, 1.18% in 2H15 and 1.17% in 1H16). At least the market cannot blame CBA for relying on a lower BDD charge this time around to boost the bottom line. The BDD charge increased by 28% on a pcp basis to $564m (+3% hoh) reflecting higher Retail Banking Services arrears (WA and QLD mining towns and personal lending), higher volume-driven collective charges in Business and Private Banking, higher individual provisions in Institutional Banking and Markets and higher commercial lending provisions in International. The overall BDD charge was however largely unchanged at 17bp of GLA, confirming our views that any increase towards the through-the-cycle charge of 20-30bp would be gradual and thus manageable. Gross impaired assets were unchanged at $2.8bn since 30 June while total provisions in relation to impaired assets and GLA were unchanged at around 37% and 0.55% respectively. Overlays are unchanged and CBA s overall credit quality remains in good order. Figure 1 Credit quality sound SOURCE: COMPANY DATA Page 3

4 We expected a higher dividend and this was also a function of our higher EPS estimate. In the end, CBA maintained its 198cps interim dividend (on a pcp basis, despite the dilution impact from its August capital raising) and maintained its target dividend payout ratio of around 70% in the first half and around 80% in the second half (around 75% on a full year basis). Organic capital generation remains strong excluding higher APRA credit RWA requirements covered by the capital raising, net organic capital generation in 1H16 was +17bp. APRA CET1 capital ratio of 10.2% translates into 14.3% on a harmonised basis, and this ranks CBA at third place among its global peers. Figure 2 Ahead of the pack SOURCE: COMPANY DATA Funding capability continues to be strong with deposit funding improving to 64% of total funding ( %) and incremental lending ($30bn) again largely funded by incremental deposits ($22bn) in 1H16. The average wholesale funding tenor has been maintained at 3.9 years while liquidity coverage further improved to 123% of total net cash outflows (120% in 2H15, 116% in 1H15). Figure 3 Strong prudentials SOURCE: COMPANY DATA Page 4

5 The variance analysis is highlighted in Table 1. Table 2 Broadly in line with our expectations Commonwealth Bank Y/E 30 June ($m) 1H16 BP Variance Comments Net interest income 7,531 7,332 3% Better volume growth on top of stable NIM Other income 3,891 3,909 0% Broadly in line with expectations Total operating income 11,422 11,242 2% Broadly in line with expectations Operating expenses -4,826-4,704-3% Higher risk/compliance spend and branch refurbishment costs Impairment expenses % Mix of higher IB&M collective provisions and lower write-backs Net profit before income tax 6,016 6,019 0% Broadly in line with expectations Corporate tax expense -1,642-1,692 3% Function of NPBT Minority interests % Broadly in line with expectations Bankwest % Sale of NVN units, investment gains and assumption changes Investment experience Large Non-recurrence of divestment benefits and revaluation gains NPAT (cash basis) 4,804 4,770 1% Broadly in line with expectations DPS (cps) % Broadly in line with expectations EPS (cash basis) (cps) % Broadly in line with expectations NIM 2.06% 2.07% -0.01% Broadly in line with expectations ROE 17.3% 17.2% 0.2% Broadly in line with expectations Underlying earnings (ex-bdd) 6,596 6,538 1% Broadly in line with expectations On a quarterly basis (Figures 4 and 5), growth again has been maintained since 2Q12 based on positive Jaws (absolute and underlying). The six-month trends (Table 3) remain healthy and include a significant improvement in ROA. Figure 4 Maintaining underlying earnings momentum Figure 5 based on positive Jaws 3.0 CBA quarterly earnings 35% Growth in CBA quarterly earnings 30% % % ($bn) % 10% 1.0 5% 0.5 0% -5% 0.0 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16-10% 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Cash earnings Underlying earnings Cash earnings Underlying earnings Table 3 Six-monthly trends Group KPIs 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Growth in NIE 4% 5% 32% 41% 21% 3% 0% 10% 12% 5% 3% 9% 8% 8% 6% 3% 6% Growth in total income 4% 6% 24% 23% 10% 2% 2% 6% 4% 1% 2% 5% 7% 6% 6% 6% 6% Growth in operating expenses 4% 8% 19% 16% 6% 3% 3% 3% 4% 2% -3% -1% 5% 4% 5% 7% 6% Growth in PBT before BDD 3% 4% 29% 30% 14% 2% 0% 8% 3% 0% 5% 10% 9% 7% 7% 5% 6% Growth in loans 8% 5% 30% 31% 8% 6% 2% 2% 6% 6% 4% 5% 6% 6% 6% 7% 8% Growth in deposits 12% 2% 35% 30% -3% 5% 9% 6% 6% 4% 2% 4% 9% 8% 9% 12% 8% NIM 2.06% 1.98% 1.99% 2.16% 2.18% 2.08% 2.12% 2.17% 2.13% 2.05% 2.11% 2.15% 2.16% 2.12% 2.11% 2.06% 2.06% Cost ratio 48% 49% 46% 46% 45% 47% 45% 46% 46% 46% 44% 43% 43% 43% 42% 43% 42% Cost / average assets 1.48% 1.52% 1.45% 1.36% 1.37% 1.36% 1.36% 1.36% 1.34% 1.29% 1.24% 1.23% 1.22% 1.20% 1.20% 1.18% 1.17% Tier 1 capital ratio 8.2% 8.2% 8.8% 8.1% 9.1% 9.1% 9.7% 10.0% 9.9% 10.0% 10.3% 10.3% 10.6% 11.1% 11.6% 11.2% 12.2% Impairment expense / GLA 0.19% 0.33% 0.87% 0.61% 0.57% 0.28% 0.29% 0.22% 0.21% 0.20% 0.23% 0.17% 0.16% 0.17% 0.14% 0.17% 0.17% Total provisions + GRCL / RWA 0.70% 0.85% 1.51% 1.92% 1.98% 1.88% 1.92% 1.83% 1.71% 1.60% 1.49% 1.36% 1.28% 1.16% 1.10% 0.99% 0.94% ROE 20.8% 19.1% 14.0% 16.1% 18.6% 18.8% 19.3% 19.8% 19.3% 18.0% 18.1% 18.4% 18.8% 18.7% 18.6% 17.7% 17.3% ROA 1.05% 0.98% 0.69% 0.78% 0.94% 0.99% 1.03% 1.06% 1.04% 1.00% 1.04% 1.09% 1.11% 1.12% 1.13% 1.05% 1.08% Page 5

6 Key segment comments Retail Banking Services (RBS) (positive outcome) RBS remains a key value driver for CBA. Cash NPAT increased by 8% on a pcp basis to $2,215m (+14% hoh) based on strong revenue growth (+7% pcp, +8% hoh) including better NIM (estimated at +3bp pcp, +12bp hoh), better other income, cost discipline (+4% pcp, +2% hoh) including flat costs as a percentage of footings and positive Jaws throughout, and a lower BDD charge. Table 4 Six-monthly trends RBS 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Market share - Home loans 9.8% 10.1% 10.5% 11.8% 12.6% 12.8% 12.9% 12.9% 11.2% 11.1% 11.1% 11.4% 11.9% 11.9% 11.9% 12.0% 12.1% - Consumer loans 0.6% 0.6% 0.6% 0.6% 0.7% 0.7% 0.7% 0.7% 0.7% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 0.7% - Deposits 11.2% 11.3% 11.9% 11.5% 12.0% 12.2% 12.1% 12.1% 11.1% 11.0% 11.3% 11.2% 12.0% 11.8% 12.0% 12.0% 12.1% NIM n/a 2.28% 2.35% 2.23% 2.35% 2.17% 2.25% 2.37% 2.46% 2.38% 2.51% 2.53% 2.59% 2.60% 2.68% 2.59% 2.71% Other income / footings 0.22% 0.22% 0.22% 0.21% 0.17% 0.16% 0.16% 0.15% 0.18% 0.17% 0.17% 0.17% 0.18% 0.17% 0.17% 0.16% 0.17% Operating expense / footings 0.43% 0.42% 0.39% 0.38% 0.35% 0.34% 0.33% 0.34% 0.37% 0.35% 0.35% 0.34% 0.34% 0.32% 0.32% 0.31% 0.31% Cost ratio 45% 47% 42% 43% 39% 40% 39% 39% 40% 40% 38% 37% 36% 34% 34% 35% 33% Impairment expense / loans 0.08% 0.10% 0.11% 0.19% 0.15% 0.13% 0.09% 0.11% 0.14% 0.09% 0.10% 0.11% 0.11% 0.10% 0.09% 0.12% 0.10% Effective tax rate 30% 30% 30% 29% 31% 29% 30% 29% 29% 30% 30% 30% 30% 30% 30% 30% 30% Business and Private Banking (B&PB) (positive outcome) This is another key value driver for CBA. Cash NPAT increased by 5% on a pcp basis to $803m (+10% hoh) based on strong revenue growth (5-6% growth pcp and hoh) and cost discipline (3-4% growth pcp and hoh). Credit quality was stable and estimated NIM improved by 3bp on a pcp basis and by 8bp on a hoh basis. Institutional Banking and Markets (IB&M) (neutral outcome) The market s worst fears were unrealised with cash NPAT just down slightly to $608m (-6% pcp, -4% hoh) due to higher BDD charges (mix of higher individual and collective provisions net of recoveries and lower write-backs) and unfavourable derivative value adjustments offsetting positive markets sales flows and trading income. Table 5 Six-monthly trends B&PB / IB&M 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Market share - Loans 6.7% 6.5% 7.0% 6.6% 6.4% 6.3% 6.0% 6.0% 8.2% 8.2% 8.1% 8.3% 8.0% 8.0% 8.0% 8.2% 8.2% - Other IEA 1.2% 1.0% 1.5% 1.7% 1.5% 1.5% 1.8% 1.6% 1.7% 1.6% 1.6% 1.6% 2.2% 1.9% 1.0% 1.2% 1.2% - IBL 12.5% 11.8% 12.2% 10.3% 9.8% 10.0% 9.8% 10.0% 12.1% 11.7% 11.3% 11.3% 11.2% 10.9% 9.3% 10.2% 10.2% NIM n/a 1.65% 1.91% 1.92% 1.93% 1.93% 1.95% 1.92% 2.15% 2.17% 2.07% 2.05% 1.92% 1.82% 2.11% 2.03% 1.98% Other income / footings 0.34% 0.37% 0.33% 0.36% 0.48% 0.43% 0.44% 0.43% 0.24% 0.22% 0.27% 0.26% 0.26% 0.24% 0.27% 0.24% 0.23% Operating expense / footings 0.32% 0.35% 0.31% 0.35% 0.38% 0.39% 0.37% 0.38% 0.29% 0.28% 0.29% 0.29% 0.27% 0.28% 0.29% 0.28% 0.28% Cost ratio 43% 44% 39% 39% 37% 41% 39% 40% 35% 36% 35% 36% 36% 38% 36% 38% 38% Impairment expense / AIEA 0.12% 0.18% 0.82% 0.44% 0.34% 0.04% 0.21% 0.17% 0.08% 0.12% 0.12% 0.09% 0.04% 0.09% 0.08% 0.07% 0.09% Effective tax rate 26% 18% -12% 19% 22% 28% 27% 26% 27% 26% 27% 27% 27% 28% 28% 26% 26% Wealth Management (positive outcome) Cash NPAT was 7% higher on a pcp basis to $372m (+22% hoh). A better insurance outcome (better volumes, repricing, lower lapses and lower claims) and a turnaround in platform contributions more than offset subdued results in funds management (spot AUM 2% higher on a pcp basis or -3% hoh to $195bn but overall result impacted by investment market volatility). Table 6 Six-monthly trends Wealth 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Growth in FUA 24% 10% -21% -9% 18% 6% 3% 5% -4% 2% 19% 25% 12% 5% 30% 32% 3% Funds management return 0.63% 0.59% 0.57% 0.47% 0.51% 0.50% 0.53% 0.52% 0.51% 0.50% 0.41% 0.39% 0.35% 0.34% 0.32% 0.28% 0.29% Growth in insurance income 0% 0% 26% 11% 8% 1% -4% -14% 7% 15% -24% -19% 1% 11% -2% -22% 20% Volume expenses / TOI 18% 18% 19% 21% 20% 20% 19% 21% 22% 20% 22% 23% 23% 24% 23% 29% 23% Growth in operating expenses 0% 0% 5% -5% -1% 2% 3% 9% 10% 4% -27% -29% -2% 3% 5% 21% 5% Effective tax rate 28% 26% 27% 31% 28% 24% 27% 27% 26% 27% 27% 26% 23% 25% 26% 20% 28% Page 6

7 New Zealand (positive outcome) Cash NPAT in NZ$ terms was 4% higher on a pcp basis to NZ$515m (+7% hoh), driven by strong revenue growth across banking, funds management and insurance, effective cost management and a better BDD outcome more than offsetting some NIM softness. Table 7 Six-monthly trends New Zealand 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 NIM % 1.50% 1.77% 1.83% 2.08% 2.12% 2.17% 2.16% 2.29% 2.32% 2.43% 2.30% 2.25% Other income / footings % 0.10% 0.14% 0.15% 0.12% 0.12% 0.14% 0.13% 0.13% 0.12% 0.13% 0.13% 0.15% Operating expense / footings % 0.37% 0.39% 0.41% 0.38% 0.41% 0.35% 0.36% 0.36% 0.36% 0.36% 0.35% 0.34% Cost ratio % 56% 52% 53% 47% 49% 43% 44% 43% 42% 40% 40% 39% Impairment expense / AIEA % 0.00% 0.06% 0.06% 0.02% 0.05% 0.04% 0.04% 0.03% 0.05% 0.05% 0.07% 0.05% Effective tax rate % 20% 23% 24% 24% 25% 24% 25% 25% 24% 25% 25% 27% Bankwest (neutral outcome) Cash NPAT was flat on a pcp basis at $396m (-1% hoh) with top line growth impacted by lower volumes from a slowing WA economy and price competition. The positives relate to cost discipline (flat operating expenses) and a lower BDD charge given ongoing net write-back. Table 8 Six-monthly trends Bankwest 1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 Market share - Home loans % 1.8% 2.0% 2.1% 2.2% 2.3% 2.4% 2.4% 2.4% 2.4% 2.5% 2.6% 2.5% 2.6% 2.5% - Consumer loans % 1.4% 1.4% 1.3% 1.2% 1.1% 1.1% 1.1% 1.0% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7% - Deposits % 5.3% 5.5% 5.5% 5.2% 5.1% 3.2% 3.1% 2.7% 2.6% 2.6% 2.7% 2.6% 2.7% 2.6% NIM % 1.97% 2.07% 2.04% 2.02% 2.19% 2.17% 1.97% 2.07% 2.13% 2.18% 2.05% 2.16% 2.11% 2.10% Other income / footings % 0.14% 0.09% 0.08% 0.09% 0.07% 0.09% 0.08% 0.10% 0.09% 0.09% 0.09% 0.09% 0.08% 0.08% Operating expense / footings % 0.39% 0.34% 0.32% 0.32% 0.32% 0.37% 0.35% 0.36% 0.36% 0.35% 0.33% 0.32% 0.30% 0.30% Cost ratio % 64% 57% 55% 54% 52% 50% 52% 48% 47% 45% 46% 42% 42% 41% Impairment expense / loans % 0.18% 0.48% 0.65% 0.07% 0.09% 0.05% 0.03% 0.12% 0.04% 0.01% 0.01% -0.03% -0.03% -0.02% Effective tax rate % 31% 32% 31% 30% 30% 30% 30% 30% 30% 30% 31% 30% 30% 30% Price target $83.50, Buy rating maintained Our estimate changes (Table 11, next page) reflect lower other income and higher BDD net of lower operating expenses. The net result is a slight decrease to cash NPAT and cash EPS across the forecast horizon of 2%. Consistent with lower EPS expectations, we have also trimmed the dividend estimates and the price target is slightly lowered to $83.50 (previously $85.50). Today s results highlight CBA s resilience and the availability of multiple value levers to pull in a challenging market Buy rating maintained. Table 9 Composite valuation Composite Valuation Value ($m) Per share Weighting Composite value per share DCF 154,745 $ % $36.25 Dividend yield (sustainable) 134,120 $ % $31.42 ROE (sustainable) 133,600 $ % $7.82 Sum-of-Parts 137,411 $ % $8.05 Total $83.54 Table 10 SOP valuation Sum-of-Parts (As Is) 2017e NPAT Pros. PE (times) Value ($m) Per share Retail Banking 4, ,009 $36.90 B&PB / IB&M 3, ,841 $23.92 Wealth Management ,605 $6.80 New Zealand 1, ,357 $8.41 BankWest & Other ,600 $4.45 Total 10, ,411 $80.47 Page 7

8 Table 11 Estimate changes Commonwealth Bank 2016e 2017e 2018e 2019e Y/e June 30 ($m) Current Previous Change Current Previous Change Current Previous Change Current Previous Change Profit & Loss Net interest income 15,191 14,870 2% 15,658 15,665 0% 16,375 16,423 0% 17,213 17,215 0% Other income 7,783 7,905-2% 8,205 8,395-2% 8,639 8,888-3% 9,090 9,413-3% Total operating income 22,973 22,775 1% 23,863 24,060-1% 25,014 25,312-1% 26,303 26,628-1% Operating expenses -9,685-9,513-2% -9,641-9,732 1% -9,838-9,995 2% -10,034-10,262 2% Impairment expenses -1,202-1,056-12% -1,443-1,233-15% -1,655-1,437-13% -1,869-1,646-12% Net profit before income tax 12,087 12,206-1% 12,779 13,095-2% 13,521 13,880-3% 14,400 14,720-2% Corporate tax expense -3,360-3,435 2% -3,555-3,681 4% -3,764-3,900 4% -4,012-4,133 3% BankWest % % % % Investment experience, etc % % % % NPAT (cash basis) 9,569 9,668-1% 10,100 10,331-2% 10,656 10,903-2% 11,311 11,539-2% DPS (cps) % % % % EPS (cash basis) (cps) % % % % ROE 16.6% 16.7% -0.1% 15.9% 16.2% -0.3% 15.6% 15.9% -0.3% 15.5% 15.7% -0.2% NIM 2.06% 2.07% -0.02% 2.05% 2.08% -0.04% 2.05% 2.09% -0.04% 2.06% 2.09% -0.03% Cost ratio 42.1% 41.8% -0.3% 40.4% 40.5% 0.1% 39.4% 39.6% 0.2% 38.3% 38.7% 0.4% Impairment expense as % of GLA 0.18% 0.16% -0.01% 0.21% 0.19% -0.02% 0.23% 0.22% -0.02% 0.26% 0.24% -0.02% Page 8

9 CBA Profile Company description CBA is Australia s leading integrated financial services organisation, providing banking and wealth management (funds management, superannuation, insurance and investment advice) products and services to over 10m customers. It currently occupies pole positions in home lending and retail deposits. The bank s strategic strengths of scale, brand and diversified mix is supported by an irreplaceable infrastructure consisting of 1,150+ branches, 3,800 Australia Post agencies, 3,300 ATMs and 155,000 merchant relationships. Investment strategy CBA s strategy is built upon continuous service and sales improvement backed by IT and operational excellence, and a leadership position in retail banking. Incremental value add is expected to come from opportunities in the SME banking, ECM / DCM and wealth management space (particularly in advice, private banking and life risk where the market is 80% underinsured) and selective Asian expansion (East Asia, Indonesia and Singapore). Valuation The price target is roughly based on a composite valuation weighted as follows. In CBA s case, this is more closely aligned to the DCF and sustainable dividend yield play values as earnings continue to normalise post the GFC and capital raising. The bank is viewed as a consistent yield story. Table 12 Composite valuation Composite Valuation Value ($m) Per share Weighting Composite value per share DCF 154,745 $ % $36.25 Dividend yield (sustainable) 134,120 $ % $31.42 ROE (sustainable) 133,600 $ % $7.82 Sum-of-Parts 137,411 $ % $8.05 Total $83.54 Table 13 SOP valuation Sum-of-Parts (As Is) 2017e NPAT Pros. PE (times) Value ($m) Per share Retail Banking 4, ,009 $36.90 B&PB / IB&M 3, ,841 $23.92 Wealth Management ,605 $6.80 New Zealand 1, ,357 $8.41 BankWest & Other ,600 $4.45 Total 10, ,411 $80.47 SWOT analysis Strengths 1. Retail banking (sales and service) and wealth management expertise; 2. Strong management and execution capabilities; 3. Low risk banking assets; 4. Scale in all aspects of diversified financial services and IT capabilities; and 5. Access to high level government and regulatory contacts in China, opening doors to further expansion opportunities. Page 9

10 Weaknesses 1. Ongoing liquidity drag that is a systemic issue. Opportunities 1. Rationalising BankWest; 2. Value add from ECM / DCM opportunities in capitalising on the bank s AA- rating and balance sheet strength; 3. Leveraged to an underinsured Australian life risk and GI market; 4. Offshore banking and wealth opportunities, e.g. Europe and US; and 5. Leveraged to wealth management and strength of NSW economy. Threats 1. Macroeconomic factors such as higher unemployment and slowing credit growth; 2. Changes in regulatory environment, especially the potential capping of fees that would crimp earnings growth; 3. Disruptors; 4. Negative fallout from financial planning review; 5. Bank re-regulation; and 6. Some sovereign risk exposed to sometimes unstable governments in Asia. Sensitivities Table 14 Sensitivities Y/e June e 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2024e Sensitivities Group NIM +10bp NPAT upside (cash basis) 5.4% 5.3% 5.3% 5.2% 5.1% 5.1% 5.1% 5.1% 5.1% - Price target upside $4.46 $4.38 $4.33 $4.27 $4.22 $4.20 $4.21 $4.20 $4.19 Group Loans +1% NPAT upside (cash basis) 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% - Price target upside $0.61 $0.62 $0.61 $0.61 $0.61 $0.61 $0.61 $0.61 $0.61 RBS loans +1% NPAT upside (cash basis) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% - Price target upside $0.39 $0.38 $0.38 $0.38 $0.38 $0.38 $0.39 $0.39 $0.39 B&PB/IB&M loans +1% NPAT upside (cash basis) 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% - Price target upside $0.25 $0.25 $0.25 $0.25 $0.25 $0.24 $0.24 $0.24 $0.24 NZ loans +1% NPAT upside (cash basis) 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% - Price target upside $0.08 $0.08 $0.08 $0.08 $0.08 $0.08 $0.08 $0.08 $0.08 Other income +1% NPAT upside (cash basis) 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% - Price target upside $0.47 $0.47 $0.47 $0.46 $0.46 $0.46 $0.47 $0.47 $0.47 BDD +1% NPAT upside (cash basis) -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% - Price target upside -$0.07 -$0.08 -$0.09 -$0.10 -$0.10 -$0.10 -$0.10 -$0.11 -$0.11 Costs +1% NPAT upside (cash basis) -0.7% -0.7% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% -0.6% - Price target upside -$0.58 -$0.55 -$0.53 -$0.51 -$0.50 -$0.50 -$0.50 -$0.50 -$0.50 Page 10

11 Commonwealth Bank as at 10 February 2016 Recommendation Buy Price $74.20 Target (12 months) $83.50 Commonwealth Bank (CBA) 10 February 2016 Table 15 Financial summary Commonwealth Bank of Australia Share Price (A$) As at 10-Feb-16 Market Cap (A$M) 126,700 PROFIT AND LOSS VALUATION DATA Y/e June 30 ($m) e 2017e 2018e Y/e June e 2017e 2018e Net interest income 13,514 14,107 15,191 15,658 16,375 NPAT (cash basis) ($m) 8,680 9,137 9,569 10,100 10,656 Other banking income 4,117 4,657 4,808 5,071 5,348 EPS (statutory basis) (cps) Total banking income 17,631 18,764 19,998 20,730 21,723 - Growth 13% 4% 1% 4% 4% Funds management income 1,796 1,938 2,083 2,182 2,290 EPS (cash basis) (cps) Insurance income ,001 - Growth 11% 5% 0% 4% 4% Total operating income 20,246 21,494 22,973 23,863 25,014 P / E ratio (times) Operating expenses -8,622-9,206-9,685-9,641-9,838 P / Book ratio (times) Impairment expenses ,038-1,202-1,443-1,655 P / NTA ratio (times) Net profit before income tax 10,682 11,250 12,087 12,779 13,521 Net DPS (cps) Corporate tax expense -2,902-3,038-3,360-3,555-3,764 Yield 5.4% 5.7% 5.7% 5.8% 6.1% Minority interests Franking 100% 100% 100% 100% 100% BankWest NPAT (cash basis) Payout (cash basis) 75% 75% 75% 74% 74% Investment experience NPAT (cash basis) 8,680 9,137 9,569 10,100 10,656 CAPITAL ADEQUACY Adjustments Y/e June e 2017e 2018e NPAT (statutory basis) 8,631 9,063 9,533 10,064 10,620 Risk weighted assets ($m) 337, , , , ,948 Average risk weight 44% 44% 49% 52% 52% CASHFLOW Tier 1 ratio 11.1% 11.2% 11.5% 11.3% 11.6% Y/e June 30 ($m) e 2017e 2018e Core Tier 1 ratio 9.3% 9.1% 9.7% 9.6% 10.0% NPAT (cash basis) 8,680 9,137 9,569 10,100 10,656 Total capital ratio 12.0% 12.7% 13.2% 12.8% 13.0% Equity ratio 6.2% 6.1% 6.7% 6.9% 7.0% Increase in loans -35,157-43,951-36,380-34,359-36,227 Increase in other assets 2,805-31,137-14,373-14,723-15,549 DIVISIONAL Capital expenditure Y/e June 30 ($m) e 2017e 2018e Investing cashflow -32,450-75,110-51,285-49,184-51,881 Retail Banking Services Net interest income 7,307 7,848 8,568 8,841 9,240 Increase in deposits & borrowings 34,489 58,214 37,299 38,726 41,379 Other income 1,695 1,754 1,877 1,990 2,110 Increase in other liabilities ,136 3,265 5,891 5,629 Total banking income 9,002 9,602 10,445 10,831 11,350 Equity raised ,476 1,832 1,916 Operating expenses -3,173-3,276-3,420-3,427-3,508 Other -4,951-6,253-6,853-7,365-7,698 Impairment expenses Financing cashflow 29,545 72,680 40,187 39,084 41,225 Net profit before tax 5,247 5,700 6,406 6,661 6,988 Corporate tax expense -1,569-1,706-1,917-1,993-2,091 Net change in cash 5,775 6,707-1, Cash net profit after tax 3,678 3,994 4,489 4,667 4,897 Cash at end of period 26,409 33,116 31,587 31,587 31,587 Home loans 271, , , , ,799 Consumer loans 16,387 16,897 17,900 19,234 20,652 BALANCE SHEET Deposits 196, , , , ,827 Y/e June 30 ($m) e 2017e 2018e Deposits non bearing interest 7,222 8,123 8,625 9,228 9,874 Cash and liquid assets 26,409 33,116 31,587 31,587 31,587 Divisional gross loans 598, , , , ,485 B&PB / IB&M Provisions -3,906-3,649-4,170-4,816-5,357 Net interest income 4,099 4,367 4,668 4,792 5,049 Divisional IEA 48,328 35,613 37,633 39,724 41,948 Other income 2,026 2,153 2,176 2,299 2,442 Other IEA & other loans 80, , , , ,317 Total banking income 6,125 6,520 6,844 7,091 7,491 Intangibles 9,792 9,970 10,018 10,018 10,018 Operating expenses -2,281-2,398-2,493-2,447-2,494 PP&E 2,816 2,838 3,371 3,473 3,578 Impairment expenses Insurance assets 15,142 14,088 15,497 16,737 17,741 Net profit before tax 3,546 3,803 3,901 4,099 4,371 Other assets 13,843 12,569 10,999 10,999 10,999 Corporate tax expense ,023-1,022-1,074-1,145 Total assets 791, , , ,434 1,024,315 Cash net profit after tax 2,573 2,780 2,879 3,025 3,225 Loans 181, , , , ,910 Divisional deposits & borrowings 483, , , , ,438 Other IEA 43,524 28,981 30,430 31,799 33,230 Other borrowings 226, , , , ,092 IBL 181, , , , ,078 Other liabilities 32,193 29,847 26,112 26,112 26,112 Deposits non bearing interest 5,081 32,169 34,421 36,830 39,408 Total liabilities 742, , , , ,642 Wealth Management Ordinary share capital 27,036 27,619 34,095 35,927 37,843 Funds management income 1,699 1,846 1,947 2,040 2,142 Other equity instruments Insurance income Reserves 2,009 2,345 2,554 2,554 2,554 Total operating income 2,274 2,349 2,529 2,668 2,808 Retained profits 18,827 21,528 24,091 26,826 29,784 Volume expenses Minority interests Operating expenses ,116-1,158-1,193-1,229 Total shareholders' equity 49,348 52,993 62,233 66,800 71,673 Net profit before tax Corporate tax expense Total sh. equity & liabs. 791, , , ,434 1,024,315 Investment experience Cash net profit after tax WANOS - statutory (m) 1,608 1,618 1,691 1,725 1,750 FUA 253, , , , ,046 WANOS - cash (m) 1,611 1,620 1,693 1,727 1,752 New Zealand PROFITABILITY RATIOS Net interest income 1,378 1,527 1,530 1,602 1,661 Y/e June e 2017e 2018e Other income Return on assets 1.1% 1.1% 1.0% 1.1% 1.1% Total banking income 1,570 1,813 1,901 2,000 2,074 Return on equity 18.7% 18.2% 16.6% 15.9% 15.6% Funds management income Leverage ratio 4.8% 4.8% 5.5% 5.6% 5.8% Insurance income Net interest margin 2.14% 2.09% 2.06% 2.05% 2.05% Total operating income 1,832 2,116 2,231 2,349 2,441 Cost / income ratio 43% 43% 42% 40% 39% Operating expenses Cost / average assets 1.20% 1.16% 1.15% 1.09% 1.06% Impairment expenses Growth in operating income 7% 6% 6% 4% 5% Net profit before tax 976 1,172 1,291 1,400 1,469 Growth in operating expenses 5% 6% 5% 0% 2% Corporate tax expense Jaws 2% 0% 2% 4% 3% Minority interests Investment experience ASSET QUALITY Cash net profit after tax ,025 1,076 Y/e June e 2017e 2018e Loans 52,153 59,592 62,366 64,875 67,470 Impairment expense / GLA 0.16% 0.15% 0.18% 0.21% 0.23% Other IEA 4,804 6,632 7,203 7,925 8,717 Impairment expense / RWA 0.28% 0.27% 0.28% 0.31% 0.35% Deposits 34,454 42,492 44,050 46,263 48,576 Total provisions ($m) 3,906 3,649 4,170 4,816 5,357 Other IBL 14,514 13,883 13,706 13,709 13,709 Total provisions / RWA 1.16% 0.99% 0.96% 1.00% 1.05% Indiv ass prov / gross imp assets 33% 31% 33% 33% 34% IBL / IEA 98% 99% 98% 98% 97% Total provisions + GRCL / RWA 1.16% 0.99% 0.96% 1.00% 1.05% SOURCE: BELL POTTER SECURITIES ESTIMATES Page 11

12 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Industrials Sam Haddad John O Shea Title/Sector Head of Research Industrials Industrials Phone tslim shaddad joshea Hold: Expect total return between -5% Chris Savage Industrials csavage and 15% on a 12 month view Jonathan Snape Industrials jsnape Sell: Expect <-5% total return on a 12 month view Sam Byrnes John Hester Tanushree Jain Industrials Healthcare Healthcare/Biotech sbyrnes jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an Financials TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Quantitative Tim Piper Hamish Murray Banks/Regionals Diversified Resources Resources Associate Analyst Associate Analyst tslim lsotiriou parden dcoates tpiper hmurray exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Securities Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. TS Lim owns 3,734 shares in CBA. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to Bell Potter, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 12