Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy?
Rhett Kessler from Pengana Capital Group Ltd (ASX: PCG) recently said that he was increasing exposure to banks.
Trading update
The major bank recently gave its FY21 first quarter update.
The big four ASX bank revealed that it generated $1.9 billion of statutory net profit after tax (NPAT) in the quarter for the three months to 30 September 2020.
It also said that it made $1.8 billion of cash NPAT, which was down 16% on the same period last year.
CBA reported that its income was stable compared to the quarterly average for the second half of FY20. Its core volume growth helped to offset lower net interest margins. Meanwhile, expenses rose by 2% excluding customer remediation (or down 4% including customer remediation provisions in the second half of FY20).
The big bank said that its credit quality indicators were insulated by repayment deferrals and government support initiatives. The provision coverage was strengthened through forward looking adjustments for economic assumptions and expected COVID-19 impacts.
The strong balance sheet settings were maintained, with deposit funding at 74%. The CET1 capital ratio of 11.8%, which was an increase of 20 basis points after the payment of the FY20 final dividend.
Looking at CBA's home loan deferrals, there was a reduction in the deferred balance of around $18 billion. There are approximately 45,600 home loans still in deferral at the end of October, worth around $19 billion – of these 27% are due to expire and exit in November, though they may be extended.
CBA CEO Matt Comyn said: "Disciplined execution of our strategy and strong operational performance continued to deliver good outcomes for our stakeholders during the September quarter. Our strong balance sheet, focus on operational excellence and the dedication and commitment of our people ensures we remain well placed to support our customers and the wider community through ongoing challenges of COVID-19."
The CBA share price went up 2.75% on the day.
APRA remedial plan
CBA also recently made an announcement and acknowledged the outcome of APRA's review of the progress made against its remedial action plan.
APRA's validation review found that CBA has made significant progress in implementing the remedial action plan. As a result, the operational risk overlay imposed on CBA was reduced from $1 billion to $500 million with immediate effect. This reduction represents an increase in the CET1 capital ratio of 17 basis points for the ASX 200 bank.
The CBA CEO said that there is still a substantial amount of work to do.
Reasons to like CBA
Mr Kessler said there were four areas for explaining the increase of the exposure to banks.
They could benefit from accelerating loan growth supported by low interest rates and first homeowner support.
The major banks can also benefit from a supportive federal budget, improving housing finance approvals and house prices holding up better than expected.
The big four banks may benefit from a meaningful reduction in loan deferrals.
Finally, the banks may see lower than anticipated loss provisioning.
Pengana continues to focus on companies that have resilient business models, robust balance sheets, competent management and are available at a reasonable price. It also focuses on owning businesses that have demonstrated a track record of "having the power" in their various stakeholder relationships.
According to earnings estimates on Commsec, the CBA share price is valued at 19x FY22's estimated earnings.
