Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy?
The major ASX bank released its FY20 result to investors this week which included a number of interesting elements.
The headline figure was that cash net profit after tax (NPAT) was down 11.3% to $7.3 billion. A large part of the reduction was due to the $1.5 billion COVID-19 provision. Clearly COVID-19 is having an effect on CBA's financials. As a bank it is connected to almost every part of the economy. The CBA share price was already down from the pre-COVID-19 price because of these expected impacts.
CBA was able to keep growing its loan book despite the difficult operating conditions. Business lending grew by 5.1%, or $7 billion in dollar terms. Home lending increased by $18.4 billion, which was 1.3 times more than the system's growth rate. Household deposits grew by $25 billion, or 9.8% in percentage terms.
Deposit funding is now 74% of total funding, up from 69% because of the deposit growth.
The growth in lending and deposits helped operating income grow by 0.8% to $23.75 billion. Operating expenses grew by 0.7% to $10.9 billion because of higher staff costs and IT costs, offset by lower remediation costs.
I think it's impressive that CBA is growing its loan book faster than the overall lending sector considering how large it is. The CBA share price can grow faster than other banks if it grows its loan book faster than the other banks in percentage terms.
A key measure for the profitability of a bank is the net interest margin (NIM). Banks lend out money, but it also has to pay someone for that funding – whether that funding is from customer deposits or from other lenders. The CBA NIM declined by 2 basis points to 2.07% for FY20 due to the impact of lower interest rates, partly offset by lower short-term funding costs.
How badly is COVID-19 affecting CBA's loan book?
As I mentioned CBA has recognised a $1.5 billion COVID-19 provision. CBA also revealed that at 31 July 2020 there were 135,000 home loans that were still being deferred – this is 8% of the total. This is down from 154,000 at the peak.
At 31 July 2020, 59,000 business loans were still being deferred – that's 15% of the total. It's down from 86,000 at the peak.
The performance of these deferred loans will have a material impact on CBA's FY21 profit and the CBA share price.
Hopefully there is a continuing trend over the next few months of fewer borrowers needing to defer repayments. Government stimulus is only going to last for a limited time. Jobkeeper is projected to end in March 2021.
Is CBA's dividend still great?
CBA announced a final dividend of $0.98 per share. That was a 57.6% cut from the FY19 final dividend. The FY20 full year dividend was $2.98, a 31% cut from the FY19 dividend.
At the current CBA share price it has a FY20 grossed-up dividend yield of 6%. That's a pretty good yield considering all of the COVID-19 impacts and the low interest world we're living in.
CBA was able to still pay a decent dividend because of its balance sheet strength. At the end of FY20 it had a CET1 capital ratio of 11.6%. That's comfortably higher than APRA's 'unquestionably strong' benchmark of 10.5%.
At this share price is CBA a buy?
CBA shares are down 21.6% from the February 2020 high before COVID-19 hit the world. That's a decent fall and may represent long-term value for income-seekers. The major ASX bank's recovery is fairly dependent on how the overall national COVID-19 picture looks as well as how the economy rebounds (or .
The CBA share price isn't cheap, but I'd prefer to buy it compared to most other banks on the ASX. However, banks could be operating in a challenged environment for some time – so there are other sectors I'd rather buy into, like technology.
