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Why shareholders shouldn’t bank on a CBA comeback yet

cba home loan commonwealth bank share price

Key statistics: ASX: CBA
Closing share price 24.07.18: $74.790
52-week high: $85.120
52-week low: $67.220
Most recent dividend: 200c
Annual dividend yield: 5.72%
Franking: 100%

The big four banks represent 27% of the S&P/ASX200, so it is unsurprising that they form an even larger part of most investors’ portfolios, and their recent share price falls have not gone unnoticed.

Since their individual recent highs, CBA and Westpac shares are down 18%, NAB is almost 20% lower and ANZ is 13%, so what should investors do?

In the long run bank profits drive share prices.  In turn, profit growth is driven by the growth in the loan book (largely mortgages) and the bank’s individual net interest margin (NIM), which is the difference between what the banks earns from its activities (mainly lending) and what it costs the bank to borrow money.

CBA has seen a weak third quarter result primarily due to weak net interest income on the back of slightly slower loan growth and weak NIM.

This is concerning given the other banks have reported stable NIM (or higher for WBC) due to lower funding cost spread.

NIM, however, will come under increased pressure in the last quarter of the year given the jump in BBSW.

Increased capital charges emanating from the current political and regulatory climate require an increase in the capital retention, resulting in a lower return on equity outlook.

LONG-TERM HOLD

Written by Roger Montgomery

Roger Montgomery

Roger Montgomery is the chairman and CIO of Montgomery Investment Management.

45 posts

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