CBA - Commonwealth Bank of Australia

[nulla nulla]

So 10% of the 13% of the profit growth came from arreas reserves (or whatever it's called), with credit growth slowing to almost nothing, am I the only one who expects CBA's next reported profit growth to be extremely low?

That is a reasonable assessment in my opinion. There will be growth but it will be tight. This applies not just to banks though, going forward. The profit level will probably be maintained or improve slightly but I bet cost cutting plays a bigger role.

 

[Knobby22]

That is a reasonable assessment in my opinion. There will be growth but it will be tight. This applies not just to banks though, going forward. The profit level will probably be maintained or improve slightly but I bet cost cutting plays a bigger role.

A great yield is a great yield though. Also we were told single figure growth for this half and yet we got double.

 

[Muschu]

I never mind disclosing what I don't know [which is quite a lot......]

I hold some CBA in my SMSF - pension phase.

1. If I sell some on Monday - when the stock goes XD - do I get the dividend or must I hold them until Tuesday?

and

2. As I have held them for less than 45 days -- will my SMSF get the franking credits or is that off the cards?

With thanks

Rick

 

[nulla nulla]

I never mind disclosing what I don't know [which is quite a lot......]

I hold some CBA in my SMSF - pension phase.

1. If I sell some on Monday - when the stock goes XD - do I get the dividend or must I hold them until Tuesday?

and

2. As I have held them for less than 45 days -- will my SMSF get the franking credits or is that off the cards?

With thanks

Rick

If the stock goes ex-div on monday and you sell them, you still get the div.
I believe you need to hold them for 45+ days to get the franking credit (however the size of the parcel may be relevent) check with your accountant.

 

[Muschu]

If the stock goes ex-div on monday and you sell them, you still get the div.
I believe you need to hold them for 45+ days to get the franking credit (however the size of the parcel may be relevent) check with your accountant.

Many thanks NN...

 

[Starcraftmazter]

That is a reasonable assessment in my opinion. There will be growth but it will be tight. This applies not just to banks though, going forward. The profit level will probably be maintained or improve slightly but I bet cost cutting plays a bigger role.

Do you feel as though this is priced in? I have read that financials are looking for staff cuts lately, I suppose there is a bit of wiggle room for artificial profit growth, but it can't be much/sustainable.

 

[Garpal Gumnut]

Do you feel as though this is priced in? I have read that financials are looking for staff cuts lately, I suppose there is a bit of wiggle room for artificial profit growth, but it can't be much/sustainable.

It does look like that SCM, it always has.

My guess is that CBA will be available cheaper soon, however I would not be against buying more at these prices if the Europeans get their act together. Relative to the other pillars it is by far the best performing.

gg

 

[craft]

Bank [Price to Book]* ratios during Australia’s last major domestic recession.

Years--90---91---92
WBC---.65--.72--.75
ANZ---.89--.82--.70
NAB---.86--1.08--1.14
CBA -------------1.10 (listed Sept 91)

Overall Average .87

Banks @ latest book value and a .87 Price to book ratio.

WBC $11.12
ANZ $11.59
NAB $15.88
CBA $20.60

Are banks likely to see historical recession level Price to Book multiples return during the next recession?



*[Closing share price on the last day of the company's financial year / shareholders equity per share]

 

[RandR]

Bank [Price to Book]* ratios during Australia’s last major domestic recession.

Years--90---91---92
WBC---.65--.72--.75
ANZ---.89--.82--.70
NAB---.86--1.08--1.14
CBA -------------1.10 (listed Sept 91)

Overall Average .87

Banks @ latest book value and a .87 Price to book ratio.

WBC $11.12
ANZ $11.59
NAB $15.88
CBA $20.60

Are banks likely to see historical recession level Price to Book multiples return during the next recession?



*[Closing share price on the last day of the company's financial year / shareholders equity per share]

Thanks for posting that. Good food for thought.

Ultimately a banks performance and stock price is going to be a reflection of the economic environment it is operating in. A bank is a 'parasite' business that needs to feed off of other well performing sectors of the economy for itself to perform. Perhaps in that sense it is thematically one of the safest plays after a time of an economic recession, because through a bank your getting a broader more diversified exposure to any upswing in economic prosperity.

In the case you've provided above, what affect do you see of ANZ diversifying there exposure and revenue into asia ? Would this not to some degree limit there exposure to being priced at the historical P/B ratio in a domestic recession ?

 

[McLovin]

Bank [Price to Book]* ratios during Australia’s last major domestic recession.

Years--90---91---92
WBC---.65--.72--.75
ANZ---.89--.82--.70
NAB---.86--1.08--1.14
CBA -------------1.10 (listed Sept 91)

Overall Average .87

Banks @ latest book value and a .87 Price to book ratio.

WBC $11.12
ANZ $11.59
NAB $15.88
CBA $20.60

Are banks likely to see historical recession level Price to Book multiples return during the next recession?



*[Closing share price on the last day of the company's financial year / shareholders equity per share]

Interesting. One observation would be the state of banking in Australia during the last recession. There had been a string of high profile bank failures (Pyramid, State Bank of SA, State Bank of Vic), and WBC itself was being seriously considered as the next to fall. This was all started by the reckless lending of banks during the 1980s to corporate cowboys and severly strained balance sheets as new deregulated banks tried to claim as much market share as possible. ANZ lent Warwick Fairfax $1b over the phone without ever meeting him, because Laurie (Connell) told them to. Today banks are mainly reliant on mortgage lending and while this does have risks, especially in what I think is an overheated property market, I don't think it's quite the same as lending a couple of bill on negative pledge to a debt laden conglomerate.

If you want a great book about corporate 1980s Australia (with quite a bit about banking) then I suggest "The Bold Riders" by Trevor Sykes. Great read although it maybe out of print.

 

[Tysonboss1]

Are banks likely to see historical recession level Price to Book multiples return during the next recession?

Anything is posssible, But unless they start taking serious hits to cashflows or atleast are rumoured to be suffering huge losses I can't see it.

I mean at $20.60 CBA would be on an earnings multiple of 4.6 and paying a 16.6% fully franked dividend. So obviously the wheels have to be falling off for a permanent rerating to this level.

I can't see it happening even if there was a large property crash, It would take alot to turn cba into a junk bond, their loan book is on less than 50% LVR.

But offcourse fear can make it happen temperarily, such as in 2008,

I think $37 would be a fair price during a recession, So if it falls below that I will be buying some.

 

[craft]

Anything is posssible, But unless they start taking serious hits to cashflows or atleast are rumoured to be suffering huge losses I can't see it.

I mean at $20.60 CBA would be on an earnings multiple of 4.6 and paying a 16.6% fully franked dividend. So obviously the wheels have to be falling off for a permanent rerating to this level.

I can't see it happening even if there was a large property crash, It would take alot to turn cba into a junk bond, their loan book is on less than 50% LVR.

But offcourse fear can make it happen temperarily, such as in 2008,

I think $37 would be a fair price during a recession, So if it falls below that I will be buying some.

Provisioning for bad debts can quickly kill profitability so using current earnings and dividends is a bit misleading as to what would happen in a recession.

Defaults happen at the margin so the average of the total loan book doesn’t mean a lot. WBC and CBA were both very aggressive in residential lending recently and that is where the higher LVR and defaults are likely to come from.

Banks are highly leveraged so a small loss on total outstanding is quickly magnified back into the capital adequacy ratios which could require equity raisings to fix.

Interesting. One observation would be the state of banking in Australia during the last recession. There had been a string of high profile bank failures (Pyramid, State Bank of SA, State Bank of Vic), and WBC itself was being seriously considered as the next to fall. This was all started by the reckless lending of banks during the 1980s to corporate cowboys and severly strained balance sheets as new deregulated banks tried to claim as much market share as possible. ANZ lent Warwick Fairfax $1b over the phone without ever meeting him, because Laurie (Connell) told them to. Today banks are mainly reliant on mortgage lending and while this does have risks, especially in what I think is an overheated property market, I don't think it's quite the same as lending a couple of bill on negative pledge to a debt laden conglomerate.

If you want a great book about corporate 1980s Australia (with quite a bit about banking) then I suggest "The Bold Riders" by Trevor Sykes. Great read although it maybe out of print.

I suspect there will be books written on lending practices after the next recession – just what the chapter headings will be is probably yet to be determined.

Are banks likely to see historical recession level Price to Book multiples return during the next recession?

I don’t know the answer to this question. Certainly the banks are a different beast now than they were back then, one major change is their diversification into wealth management etc etc. However I guess I would be surprised if they could not be bought below book value at some stage during a recession.

My inclination on buying banks is to wait until a domestic recession throws the closet door open and reveals what skeletons have been stashed. It is beyond my research capabilities to determine this at any other time.

 

[McLovin]

It is beyond my research capabilities to determine this at any other time.

I agree 100%. Most analysts don't really know what's going on inside a bank at any point in time.

 

[pavilion103]

It looks like there is some strong supply coming in in the last couple of days. What do people think. It looks destined to decline but when?

 

[Ves]

Sold this today after making around 40% return in 14 months.

I do not see any imminent trouble - but I am ever weary about our economy slowing. This is more a play it safe, wait and see, sell decision. I don't see much upside in their earnings in the next few years.

 

[Klogg]

Sold this today after making around 40% return in 14 months.

I do not see any imminent trouble - but I am ever weary about our economy slowing. This is more a play it safe, wait and see, sell decision. I don't see much upside in their earnings in the next few years.

Not that I own any banks, but to be honest, I'd be doing the same thing.

The amount of foreign funds that our banks borrow is fairly high, and given:
- the AUD forecast is either flat or falling (I don't recall anyone forecasting a rise in the AUD)
- mortgage growt rates aren't going to shoot the lights out
- Basel III will have some impacts on banks capital requirements (and ultimately the return on this capital)
then I can't see them doing as well as they've done in the past.

Ofcourse, I could be way wrong on this... time will tell I guess

 

[McLovin]

I can't understand how banks continue to grow and grow. CBA is now capped at about 8% of GDP. These banks are pretty much just mortgage lenders in Australia, so at these sort of levels they can't keep going up or they will end up outperforming Australia.

 

[skc]

I can't understand how banks continue to grow and grow. CBA is now capped at about 8% of GDP. These banks are pretty much just mortgage lenders in Australia, so at these sort of levels they can't keep going up or they will end up outperforming Australia.

Well they do have some business overseas so it's not just domestic... And GDP is one-year P&L type number while market cap is present value of cashflow forever into the future. The "market cap" for Australia is probably something like 15x GDP I'd imgaine.

 

[McLovin]

Well they do have some business overseas so it's not just domestic... And GDP is one-year P&L type number while market cap is present value of cashflow forever into the future. The "market cap" for Australia is probably something like 15x GDP I'd imgaine.

Sure, that's true, but GDP does give a good idea of how much profit you can take out of an economy and by extension how big you can get. Given their size, it's hard to see how the Big 4 will grow at much over the rate of GDP growth.

You reckon it's as high 15x? I would have thought 5-6x.

GDP $1.3t
Property ~$4t
Sharemarket ~$1.2t

Those two are probably the two largest single asset pools. And that would give 4x GDP before subtracting debt. Hmm...maybe 5-6 is too high.

ETA: Found something from the ABS...

In June 2009, Australia's real national net worth was $6,899b, and real national net worth per capita was $314,200 (in 2007-08 prices). Between June 1999 and June 2009, Australia's real national net worth per capita rose by an average annual rate of 0.9%.

http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by Subject/1370.0~2010~Chapter~Net worth (5.2.2)

 

[tinhat]

Gee, there's a bit of over-analysis going on here perhaps? Bank share prices rose on the back of their mortgage books and the credit boom, sure. But the current environment and the outlook is for very modest growth in earnings currently driven by cost cutting efficiencies more than anything else.

McLovin, you could make similar arguments about supermarkets too. Just how much growth is there left in supermarkets? Did anyone ever think twenty years ago that Woolworths would be a major pokie machine operator and publican?

Just to think outside the square for a moment. How important have financial services become in our daily modern lives though? When I started working everyone got paid in cash and you either paid with things using that cash or a cheque. Twenty-five years ago if you told me people would be using plastic cards to buy drinks at a night club I would have laughed at you.

This is a mega-trend that is only going to continue. Just think that if bank like CBA that are a bit ahead of the curve in their IT strategy, can get their IT and marketing strategies right how much upside potential there is in integrating financial services and in cross-marketing to their clients. Firstly, 99.9% of adult Australian are a bank customer. Secondly, is there anything about me that CBA (who I do my daily banking with and now my broking too) doesn't know? They know what shares I buy - and should be able to determine my risk profile. They know about at least 67% of all my expenditure and 100% of all my income. They can probably work out what health plan I am on with my health insurer.

In a former life I use to train bank staff (twenty years ago). Even with the IT systems and the right strategies in place there would still need to be a complete cultural/generational shift of branch/customer support staff required to transform banks along the lines I envisage but it is the direction surely they must take.