AUSTRALIA CBA AU Price (at 06:10, 10 Sep 2013 GMT) Neutral A$73.63 Valuation A$ - DCF (WACC 10.3%, beta 1.0, ERP 5.0%, RFR 5.5%) 50.40 12-month target A$ 66.15 12-month TSR % -5.0 Volatility Index Low GICS sector Banks Market cap A$m 118,686 30-day avg turnover A$m 292.1 Number shares on issue m 1,612 Investment fundamentals Year end 30 Jun 2013A 2014E 2015E 2016E Net interest Inc m 13,944 14,487 15,025 15,705 Non interest Inc m 7,555 7,802 8,097 8,455 Underlying profit m 11,894 12,490 13,038 13,670 Reported profit m 7,677 8,033 8,379 8,794 Adjusted profit m 7,779 7,993 8,339 8,754 EPS adj 471.1 480.2 492.7 507.8 EPS adj growth % 8.8 1.9 2.6 3.0 PER adj x 15.6 15.3 14.9 14.5 PER rel x 0.95 1.08 1.17 1.23 Total DPS 364.0 384.0 394.2 411.7 Total div yield % 4.9 5.2 5.4 5.6 Franking % 100 100 100 100 ROA % 1.1 1.0 1.0 1.0 ROE % 18.1 17.7 17.6 17.1 Equity to assets % 6.0 5.8 6.0 6.2 EV/EBITDA x nmf nmf nmf nmf P/BV x 2.7 2.7 2.5 2.4 CBA AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, September 2013 (all figures in AUD unless noted) Broking a different story... Event The mortgage battle remains centred on the broker channel where CBA has and continues to need to grow rapidly particularly given strong levels of proprietary mortgage paydown. While the short term margin is a function of many variables, ultimately strong growth in the broker channel comes at the cost of a lower margin and a more price sensitive customer base. Impact Mortgage battle centred on Broker channel where CBA is growing at 1.6x system Broker growth for CBA s core brand continues to run at a much faster pace (8.5% or c1.6x system) than proprietary channel growth (c1x system). This is consistent with our thesis that CBA is pushing in to the broker channel aggressively (see our note Everyone loves a discount Australian Banks - Everybody loves a discount). CBA needs this growth given their proprietary channel customers are paying down mortgages rapidly with ~6.5% of total balances paid down in 2H13. Ultimately broker growth is not as high quality as proprietary growth - Ultimately strong growth in the broker channel comes at the cost of lower margin and a more price sensitive customer base. This comes at a time when competition continues to pick up and refinancing gathers pace, meaning the ongoing risk to CBA is one of churn as better rates come along. FY14 margin outlook sensitivity +1 to -4bp including 1+bp further decline from strong broker growth The FY14 margin is a function of many variables. We estimate asset repricing is likely to be a drag of 1-2bp (including ongoing drag from above system broker growth). Funding costs could swing either way with wholesale continuing to moderate although deposit costs may offset this. Basis risk is likely to be a negative driver. This leaves the margin outlook squarely skewed to the downside in our view. Earnings and target price revision Downgraded FY14E Cash NPAT by 0.6% and FY15E by 1.0% driven by margin decline & paydown. Price catalyst 12-month price target: A$66.15 based on a DDM/PE methodology. Catalyst: 1H14 result in February 2014 Action and recommendation CBA remains a quality company. However the market s obsession with margin movements over the quality of NII growth has led to mispricing in the case of CBA in our view. Maintain Neutral. 10 September 2013 Macquarie Securities (Australia) Limited Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.
Analysis The mortgage battle remains centred on the broker channel where CBA has and continues to need to grow rapidly particularly given strong levels of proprietary mortgage paydown. While the short term margin is a function of many variables, ultimately strong growth in the broker channel comes at the cost of a lower margin and a more price sensitive customer base. We discuss below. Mortgage battle centred on Broker channel where CBA is growing at 1.6x system Broker growth for CBA s core brand continues to run at a much faster pace (8.5% or c1.6x system) than proprietary channel growth (c1x system). This is consistent with our thesis that CBA is pushing in to the broker channel aggressively. Fig 1 Growth by channel shows above system growth in broker and proprietary % 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 8.5 6.7 5.8 5.8 5.2 5.1 4.6 4.2 3.6 3.6 3.2 3 3 2.4 2.6 2.2 Dec 11 Jun 12 Dec 12 Jun 13 Brokers Proprietary CBA Total System *CBA Total excludes Bankwest Source: Company data, APRA, RBA, Macquarie Research September 2013 CBA needs this growth given their proprietary channel customers are paying down mortgages more rapidly than in the broker channel with ~6.5% of total balances paid down in 2H13 (compared to ~3.8% in the broker channel). Fig 2 Proprietary channel has relative paydown that is c2x that of broker channel 1H13 2H13 Fundings Broker 8.8 12.9 Prop 16.7 21.1 Fundings (% balances) Broker 8.5% 12.3% Prop 9.9% 12.3% Implied Paydown Broker -3.90% -3.78% Prop -7.69% -6.51% Source: Company data, Macquarie Research, September 2013 2.0 1.7 times However when BankWest is included in the analysis, overall proprietary growth is just at system levels with broker growth at 1.5x system While the above effort is strong on the proprietary side of the yellow brand, CBA did not include a Group picture (i.e. including BankWest). When including BankWest (where over 60% of mortgages are sourced from the broker network), the picture does change with Group proprietary growth at system levels and broker growth travelling at a strong 7.6%. 10 September 2013 2
Fig 3 CBA growing at system in Proprietary channel incl BankWest; Faster than system in broker Jun-12 Dec-12 Jun-13 Notes Total Home Loans CBA Yellow Label (Bus & retail) 272,388 276,463 285,741 Bankwest 50,953 51,567 52,738 323,341 328,030 338,479 Broker - % of balances 38% 38% Proprietary - % of balances 62% 62% Home Loans (ex Bankwest) Proprietary growth 2.20% 5.80% Broker 4.60% 8.50% CBA Total 3.00% 6.70% Bankwest Proprietary 0.92% 1.73% BW: 38% Proprietary/62% Broker Broker 1.49% 2.82% Bankwest Total Loan Growth 2.41% 4.54% Proprietary growth incl Bankwest 2.00% 5.17% Broker growth incl Bankwest 4.11% 7.61% 2.90% 6.37% System growth 3.60% 5.10% Per APRA/RBA Source: Company data, Macquarie Research, September 2013 Ultimately strong growth in the broker channel comes at the cost of lower margin and a more price sensitive customer base. This comes at a time when competition continues to pick up and refinancing gathers pace, meaning the ongoing risk to CBA is one of churn as better rates come along. FY14 margin outlook sensitivity +1 to -4bp including 1+bp further decline from strong broker growth CBA s Group margin and retail margin are at record levels post GFC. Fig 4 CBA s group margin is at record level post GFC 2.70% 2.50% 2.30% 2.10% 1.90% 1.70% 1.50% 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13 2H13 Retail NIM Group NIM Source: Company data, Macquarie research, September 2013 Ultimately margin pressure will start as competition continues to pick up, refinancing gathers pace and the replicating portfolio starts to bite. 10 September 2013 3
Fig 5 While we don t think the replicating portfolio will negatively impact the NIM in FY14 it could start to bite in FY15 Source: Commonwealth bank, Macquarie research, September 2013 The increase in the NIM HoH was driven by strength in asset yields compared to the movement in the cash rate. We do not think this level of asset pricing will be sustainable over the medium term given the reduction in the cash rate. Fig 6 Increase in NIM HoH due to increase in yields on personal and business loans relative to the movement in the cash rate Yield Movement relative to Cash Rate (-40bps) 1H13 2H13 (bps) Interest Earning Assets Home loans 5.80% 5.45% 5 Personal loans 12.85% 12.72% 27 Business and corporate loans 5.39% 5.35% 36 Total Loans 5.95% 5.70% 15 Cash and liquid assets 0.92% 0.90% 38 Assets at fair value through Income statement 2.84% 2.60% 16 AFS investments 3.60% 3.18% (2) Non-lending interest earning assets 2.75% 2.49% 14 Total interest earning assets 5.44% 5.20% 16 Interest Bearing Liabilities Transaction Deposits 1.49% 1.47% (38) Savings deposits 3.04% 2.74% (10) Investment deposits 4.32% 3.91% 1 CD's and other 4.64% 4.41% (17) Total Interest bearing deposits 3.56% 3.24% (8) Payables due to other financial institutions 1.01% 1.19% (58) Liabilities at fair value through Income statement 3.11% 2.72% (1) Debt Issues 4.06% 3.52% 14 Loan Capital 4.38% 4.52% (54) Total Interest bearing liabilities 3.58% 3.25% (7) Benefit of interest-free liabilities, provisions and equity 0.24% 0.22% 2 Net Interest Margin 2.10% 2.17% 7 Source: Macquarie Research, September 2013 10 September 2013 4
Jan-2000 Oct-2000 Jul-2001 Apr-2002 Jan-2003 Oct-2003 Jul-2004 Apr-2005 Jan-2006 Oct-2006 Jul-2007 Apr-2008 Jan-2009 Oct-2009 Jul-2010 Apr-2011 Jan-2012 Oct-2012 Jul-2013 Macquarie Private Wealth Looking at the value of refinancing historically it can be seen that a decline in the cash rate is normally coupled with an increase in refinancing. Fig 7 Historically refinancing has increased when the cash rate decreases Refinance $/ RBA GLA Balance 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 % 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Housing Finance Cash rate (RHS) Source: ABS, RBA, Macquarie research, September 2013 Looking forward the FY14 margin is a function of many variables. We estimate asset repricing is likely to be a drag of 1-2bp (including ongoing drag from above system broker growth). Funding costs could swing either way with wholesale continuing to moderate although deposit costs may offset this. Basis risk is likely to be a negative driver. This leaves the margin outlook squarely skewed to the downside in our view. Fig 8 For 1H14 we estimate there could be a +1 4 impact on the NIM 2H13 vs. 1H13 1H14 vs. 2H13 Actual High Low Asset Pricing 3-1 -2 Funding Costs -2 1-1 Basis Risk 2-1 -2 Portfolio Mix 3 0 0 Replicating Portfolio 1 2 1 Bps change in NIM 7 1-4 Source: Macquarie Research, September 2013 While there may be offsets on the cost side, ultimately the market does not fully capitalise these as has been shown time and again. 10 September 2013 5
Investment View Small downgrades Small downgrades to FY14 and FY15 from margin decline and pay-down. Fig 9 Downgraded FY14E NPAT by 0.6% and FY15E and FY16E by 1.0% and 0.9% respectively $m FY14 FY15 FY16 Cash NPAT Old 8,041 8,421 8,833 New 7,993 8,339 8,754 % Change -0.6% -1.0% -0.9% Cash EPS Old 483 498 512 New 480 493 508 % Change -0.6% -1.0% -0.9% Dividend Old 384 394 412 New 384 394 412 % Change 0.0% 0.0% 0.0% Source: Macquarie Research, September 2013 CBA remains a quality company. However the market s obsession with margin movements over the quality of NII growth and a six month view has led to mispricing in the case of CBA in our view. Maintain Neutral of Australia Year Ending 30 June 2012 1H13 2H13 2013 2014 2015 2016 Neutral PER SHARE DATA 433 228 243 471 480 493 508 Cash EPS (AUD) - Macquarie Basis Current Price Target Price Cash EPS Growth (%) 3% 7% 6% 9% 2% 3% 3% A$73.90 $66.15 DPS (AUD) 334 164 200 364 384 394 412 Total Shareholder Return -5.3% BVPS (AUD) 25 26 27 27 27 29 30 NTA PS (AUD) 19 20 21 21 21 22 24 Bloomberg: CBA AU Shares on issue (m) 1,592 1,609 1,612 1,612 1,629 1,659 1,690 Reuters: CBA.AX VALUATION METRICS Macquarie Equities Australian Banks P/E (Cash) 17.1 16.2 15.2 15.7 15.4 15.0 14.6 Analyst(s) Contact(s) P/B (Stated) 2.9 2.8 2.7 2.7 2.7 2.6 2.5 Michael Wiblin +61 2 8232 6089 P/NTA 3.9 3.8 3.5 3.5 3.5 3.3 3.1 Anita Stanley +61 2 8232 9869 RoE (%) - Cash 18.4% 17.7% 17.1% 17.1% 17.7% 17.4% 16.8% RoA (%) 1.0% 1.0% 1.1% 1.1% 1.0% 1.0% 1.0% Dividend Yield (%) 4.5% 4.4% 5.4% 4.9% 5.2% 5.3% 5.6% Dividend Payout (%) 77.1% 71.9% 82.4% 77.3% 80.0% 80.0% 81.1% Margins & Volumes Cost of Equity (%) 10.3% 10.3% 10.3% 10.3% 10.3% 10.3% 10.3% 7.0% Net Interest Margin (RHS) GLAA Growth (LHS) 2.80% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 2012 1H13 2H13 2013 2014 2015 Efficiency Cost/Income Ratio (RHS) Cost Growth (LHS) 2.30% 1.80% 46.0% 45.0% 44.0% 43.0% PROFIT & LOSS (AUDm) Net Interest Income 13,064 6,862 7,082 13,944 14,487 15,025 15,705 Non-Interest Income 7,086 3,757 3,798 7,555 7,802 8,097 8,455 Fees & Commissions 3,268 1,502 1,541 3,043 3,066 3,152 3,297 Financial Markets 523 443 420 863 810 839 873 Life and Funds 2,917 1,538 1,646 3,184 3,548 3,723 3,879 Other Revenue 378 274 191 465 378 383 406 Total Operating Income 20,150 10,619 10,880 21,499 22,289 23,122 24,160 Total Operating Costs 9,196 4,755 4,850 9,605 9,799 10,084 10,489 Employee Costs 4,947 2,564 2,584 5,148 5,324 5,539 5,763 Other Costs 4,249 2,191 2,266 4,457 4,475 4,545 4,727 Pre-Provision Operating Profit 10,954 5,864 6,030 11,894 12,490 13,038 13,670 Impairment Charge 1,089 616 466 1,082 1,381 1,435 1,482 Pre-Tax Profit 9,865 5,248 5,564 10,812 11,109 11,603 12,188 Tax Expense 2,736 1,460 1,517 2,977 3,060 3,208 3,378 Minority Shareholders 16 8 8 16 16 16 16 Other Post Tax Items 23 119 23 142 0 0 0 Stated Net Profit 7,090 3,661 4,016 7,677 8,033 8,379 8,794 Extraordinary & Other Items -18 99 3 102-40 -40-40 Hybrid Distributions 1 0 0 0 0 0 0 Derivatives & Hedging Revaluation 0 0 0 0 0 0 0 Macquarie Cash Profit 7,073 3,760 4,019 7,779 7,993 8,339 8,754 0.0% 120% 100% 80% 60% 2012 1H13 2H13 2013 2014 2015 Asset Quality Impairment Charge (RHS) Coverage (LHS) 42.0% 45 40 35 30 25 20 BALANCE SHEET & CAP AD (AUDm) Risk Weighted Assets 302,787 301,611 329,158 329,158 339,140 349,001 359,386 Interest Earning Assets 624,281 649,394 657,951 653,673 687,605 722,926 759,989 Gross Loans, Advances & Acceptances 542,097 549,216 568,821 568,821 602,736 633,058 665,177 Total Deposits 572,389 577,521 601,924 601,924 637,812 669,899 703,888 Total Assets 718,229 721,339 753,876 753,876 795,310 830,725 868,192 Shareholders Equity 41,572 43,299 45,492 45,492 45,996 49,834 53,798 Tier 1 Capital 30,299 31,780 33,705 33,705 36,435 40,157 44,004 Tier 1 Ratio (%) 10.0% 10.5% 10.2% 10.2% 10.7% 11.5% 12.2% Core Tier 1 Ratio (%) - Basel II 7.8% 8.3% 8.2% 8.2% 8.8% 9.6% 10.4% Core Tier 1 Ratio (%) - Basel III 7.5% 8.1% 8.2% 8.2% 8.8% 9.6% 10.4% 40% 15 20% 0% 2012 1H13 2H13 2013 2014 2015 10 5 0 ASSET QUALITY Impairment Charge / GLAA (bp) 20 23 17 19 23 23 22 Coverage (%) 107% 109% 107% 107% 74% 55% 43% KEY RATIOS & GROWTH Source: Company data, Macquarie Research, September 2013 Net Interest Income growth (%) 3.2% 5.4% 3.2% 6.7% 3.9% 3.7% 4.5% Non-Interest Income growth (%) 1.2% 6.4% 1.1% 6.6% 3.3% 3.8% 4.4% Total Revenue growth (%) 2.5% 5.7% 2.5% 6.7% 3.7% 3.7% 4.5% Cost growth (%) 3.4% 3.5% 2.0% 4.4% 2.0% 2.9% 4.0% Pre-Provision Profit growth (%) 1.7% 7.6% 2.8% 8.6% 5.0% 4.4% 4.9% RWA growth (%) 7.5% -0.4% 9.1% 8.7% 3.0% 2.9% 3.0% GLAA growth (%) 4.6% 1.3% 3.6% 4.9% 6.0% 5.0% 5.1% Deposit growth (%) 9.1% 2.5% 2.5% 5.0% 6.0% 5.0% 5.1% Net Interest Margin (%) 2.09% 2.11% 2.15% 2.13% 2.11% 2.08% 2.07% Cost / Income Ratio (%) 45.6% 44.8% 44.6% 44.7% 44.0% 43.6% 43.4% 10 September 2013 6
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2013 AU/NZ Asia RSA USA CA EUR Outperform 49.80% 57.68% 48.05% 41.13% 61.75% 47.10% (for US coverage by MCUSA, 8.12% of stocks followed are investment banking clients) Neutral 39.85% 24.45% 42.86% 54.70% 34.42% 30.89% (for US coverage by MCUSA, 6.60% of stocks followed are investment banking clients) Underperform 10.35% 17.87% 9.09% 4.17% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of of Australia. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of of Australia's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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