In a research note published on Tuesday, Morningstar analyst David Ellis said the outlook on CBA is based on the bank’s robust balance sheet, dominant market positions, strong profitability, organic capital generation, sound loan book and high returns on equity.
Morningstar said only a bank funding crisis, a severe downturn in Australia or a housing collapse could force sharp falls in earnings and dividends.
“Strong loan quality and dominant market positions stand out, and as the bank moves through the aftermath of the royal commission debacle, we can see better times ahead,” Mr Ellis said in his note.
“CBA has traded at a premium to major bank peers due to lower financial risk and a long history of sustainable earnings and dividend growth despite slow system credit growth and pressure on funding costs.
“Some market investors consider CBA’s strong emphasis on home loans a weakness, but we argue it is a key strength. In our view, concerns centred on a US-style housing crash in Australia are overdone.”
CBA announced a cash net profit after tax (NPAT) of $4.67 billion in 1H19, which was up 1.7 per cent from 1H18.
According to Morningstar, the result was “messy and slightly below our expectations”, as it was expecting around $4.9 billion in cash earnings. Further, statutory NPAT of $5.6 billion was 4 per cent lower than prior corresponding period.
It forecasted a fiscal 2019 cash profit of $9.7 billion, with the $4.33 per share fully franked dividend unchanged.
“Despite the softer outlook, we remain confident in the long-term earnings outlook for Australia’s biggest bank. At current prices, the stock is trading 9 per cent below our valuation.
“The performance highlights the challenges facing the major banks, primarily slowing loan growth, a weakening housing sector, pressure on NIMs, elevated remediation costs, and relatively soft returns on equity,” the note said.
“However, we have allowed for these headwinds in our forecasts and continue to see slow and steady improvements in operating performance and earnings.
“We expect the orderly correction in Australia’s housing market to continue for the next year at least, but the strength of Commonwealth Bank’s brand, we believe, will support good growth in home loan volumes supported by the bank’s large branch network and online capability.”
