CBA Mortgage Wars


But the nearly 7% drop in the CBA’s stock price on Wednesday in response to the NIM crisis suggests that the market has not reset expectations for CBA earnings and margins as it did. made for other banks.

The ABC seems to be back in the pack, in more ways than one.

That’s not to say the ABC isn’t holding up as competition intensifies.

Home loan volumes rose $ 10.1 billion in the September quarter, which has traditionally been the CBA’s weakest, as the housing market spends much of the winter in hibernation. Importantly, the CBA has increased its mortgage portfolio to 1.1 times the system’s growth, indicating that it is getting its fair share of market activity, slightly more.

But the rest of the Big Four are fighting back.

The rivals are getting closer

ANZ, which misinterpreted this year’s real estate boom and fell far behind in processing mortgages, is desperately trying to regain its lost share.

And Westpac, which has been plagued by mortgage processing issues in the first half of the 2021 schedule, is said to be the most enthusiastic discount in the market, offering the most fierce competition to the CBA in the state of. origin of the pair from NSW, and to a lesser extent in Victoria.

The gap between CBA and its rivals is clearly narrowing as the pursuers pull themselves together.

In the September 2020 quarter, the CBA increased home loans to twice the system growth. For the six-month period ended December 31, 2020, home loans increased at 1.5 times the system growth.

There is no doubt that CBA chief executive Matt Comyn will be happy that the bank is still ahead of the rest of the market with 1.1 times the system growth, but Wednesday’s numbers suggest. that competition forces the CBA to follow the lead of its rivals and take out less profitable loans. to defend his mortgage patch.

There was better news in business lending, where loan volumes increased by $ 3.1 billion and the growth was 1.5 times the growth of the system, which the ABC said was a stable margin.

Spending rose 3% in the quarter, although that was largely due to a problem plaguing many businesses across the country: a build-up of vacation leave balances due to COVID-19.

Westpac and Woolworths are among the companies to have reported the problem, which is expected to ease with the opening of borders and the easing of travel restrictions. A windfall for the pre-Christmas vacation is looming as, at least for the record, there appears to be a push through ASX for staff to take their time off before December 31st.

Comyn will also be satisfied with the excellent quality of assets and the capital situation of CBA; While the bank’s $ 6 billion buyout will push Tier 1 capital from 12.5% ​​to 11.2%, divestments and organic capital generation are expected to push that level up by 12% fairly quickly.

There is no doubt that Comyn and his team have played the pandemic well from a strategic standpoint. The ABC provided appropriate support in the depths of recession last year, it moved quickly to dominate the resurgence of the mortgage market in the second half of 2020, it sank into corporate banking in the She and NAB have gone on to make a series of technology investments that are designed to try to put banking – and more specifically its mobile banking app – at the center of customers’ lives.

As Victor German, analyst at Macquarie Bank puts it: “There is no doubt that CBA is a strong franchise that has performed better and more consistently than its peers.”

But the question for investors is how much are they willing to pay for this better performance?

High expectations

CBA has always been an outlier in terms of bank valuations, not only in Australia but around the world.

It trades on a 12-month futures price-to-earnings ratio of 22 times, compared to its top three rivals which trade between 14 and 16 times, a premium of over 30%.

But can he live up to this multiple? The German has doubts. “Based on its current multiple, CBA is expected to generate approximately 5% higher earnings per share growth than its peers over the next five years to become a more realistic multiple (approximately 10% premium over peers) . which we consider unrealistic, especially in the context of his recent performances. “

By removing the provisions, which have driven bank profits up and down like a roller coaster over the past three years, German says CBA revenue has seen a 1% drop in revenue, in line with ANZ and NAB , but better than Westpac’s 13% drop.

Spending over the same period grew 7 percent, broadly in line with its peers (ANZ, with 5 percent growth, is the best, while Westpac, with 11 percent growth, is the worse). Profits during the period fell 7 percent, again in line with all peers other than Westpac (down 31 percent).

German wonders if there are other ways to get exposure to the domestic banking sector, plus the CBA quality premium, by buying, for example, either NAB or Westpac plus a basket of top 10 Australian stocks by market capitalization, excluding banks, resource companies and equity infrastructure.

“While not a comparable comparison, we note that investors may gain exposure to the national balance sheet with other growth companies at a lower price than investing in CBA,” said he declared.

Whatever you think of that idea, the point is, the ABC’s premium review forces it to do more than just stay one step ahead. Or like Evans & Partner banking analyst Matthew Wilson said, “CBA’s high rating demands sustained execution excellence and success with its desire to ‘like a platform’. “

It may be Australia’s largest bank – and arguably the best positioned to weather the disruption the industry at large faces, but Wednesday’s numbers show how difficult it is to outperform in a world low interest rates and intense competition.


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