The Commonwealth Bank of Australia (ASX: CBA) share price will be on watch on Wednesday following the release of the banking giant's half year results.
Here is a summary of how the bank performed during the six months to December 31:
- Operating income of $12,408 million, down 1.9%.
- Net interest margin (NIM) of 2.10%, 4 basis points lower than the second half of FY 2018.
- Statutory net profit after tax (NPAT) including discontinued operations of $4,599 million.
- Cash NPAT from continuing operations of $4,676 million, up 1.7%.
- Cash earnings per share of 265.2 cents, an increase of 0.9 cents per share.
- Interim dividend flat at $2.00 per share.
What were the drivers of this result?
Operating income was down 1.9% on the prior corresponding period due to volume growth being offset by its NIM decline, lower fees, weaker trading income and insurance income impacted by weather events. Overall, net interest income was down 1.3% on the prior corresponding period.
Volume growth in the core business saw the bank's lending and deposits grow by 2%. Home loan volumes increased 4% and business lending, including New Zealand, was up 5%. The continued optimisation of its institutional portfolio resulted in a 6% decline in volumes. Transaction deposit balances increased 8%.
The bank achieved home lending growth of 4%. This was broadly in line with domestic system growth, following two halves of moderation as the bank took early action to manage regulatory requirements.
Group transaction balance increased 8% thanks largely to a strong performance in the Retail Banking Services division which saw interest bearing transaction deposit balances increase 14%.
CBA's NIM was down 4 basis points on the prior half. Management blamed higher funding costs, the impact of customers switching from interest only to principal and interest and from investor to owner occupied home loans, reduced fixed rate home loan pricing, and home loan competition. These factors offset deposit repricing and the home loan reprice which took effect from October 4.
Other banking income was down 4.8% during the half. This was due to reduced commissions and fees as a result of lower credit card income and following the simplification and removal of certain customer fees. Trading income was 11% lower, driven by the weaker Markets trading performance reflecting widening yield curves and weaker Markets sales performance due to lower client demand.
Funds management income was flat despite an increase in average funds under administration of 6.5%. Insurance income was $44 million lower, driven by higher insurance claims primarily due to the NSW/VIC storms.
What's next?
The bank's chief executive officer, Matt Comyn, appears optimistic on its prospects in the second half thanks to the strength of the Australian economy, wage growth, and export demand.
He said: "As the economy is strong and lending standards have improved, credit quality remains sound. We are focused on continuing to serve our customers' financial needs and to support the economy, with the backing of a strong and resilient balance sheet. There is much work ahead as we understand the implications and implement the recommendations of the Royal Commission. We have a clear mandate, a strong franchise and dedicated people. We are already making the necessary changes and will be a better bank as a result."
Should you invest?
I thought this was a solid but unspectacular result and largely in line with expectations that were laid out here.
Overall, I think CBA is in the buy zone today, though I would choose Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) shares ahead of it for valuation reasons and also their exposure to the strong performing business lending market.
