Despite CBA shares (ASX CBA) recently getting into hot water over the royal banking commission, we think that the CBA share price today is still a buy. The recent pressure on the Commonwealth Bank share price is an opportunity to buy the stock.
We go into more detail about why the banks are still a great buy in our May monthly newsletter – How the royal commission will affect the banks. On top of this, CBA is easily the best bank out of the major four on a number of qualitative and quantitative factors and a great dividend payer. We show you why we think the CBA share price today is a buy.
About Commonwealth Bank of Australia (ASX CBA)
Commonwealth Bank of Australia (ASX CBA) is Australia’s leading financial services organization, providing retail, business and institutional banking services to over 10 million customers. With the support of innovative technology, Commonwealth Bank stock has a strong and leading position in home lending and retail deposit products.
Commonwealth Bank stock also has the largest physical distributional network in Australia which consists of 1,150 branches, 3,800 Australia Post agencies, 3,300 ATMs and 155,000 merchant relationships.
Financial Planning Troubles Only A Small Piece Of The CBA Pie
The recent troubles with the banking royal commission into Financial Planning has thrust CBA and other banks into the spotlight. This has caused quite a bit of downward pressure on the CBA share price. However, we see this as a buying opportunity. CBA, along with the other major Australian banks ANZ and NAB have started to or will commence divestment of their Financial Planning arms. Westpac is the only one that is not looking to divest.
In addition, according to CBA’s 2018 half-year results, CBA’s Financial Planning arm Colonial First State (CFS) makes up just $500 million of the $21.26 billion in revenue from ordinary activities. At just 2.3% of CBA’s massive revenue line, the issues with Financial Planning are not material.
The recent CBA share price route due to issues at Colonial First State is overdone and presents a buying opportunity for astute investors.
CBA Building On Its Technological Advantage
Commonwealth Bank stock continues to improve customer satisfaction by investing in Technology such as Netbank. Commbank spent up to AU$1.2 billion on IT services in the first half of FY17 where AU$222 million was spent on technology application, maintenance, and innovation.
CBA became the first to provide the temporary lock and unlock on credit card service, which gave customers more confidence on credit card security. Furthermore, with the innovation of instant transaction alerts for credit cards as well as camera pay, customers are able to receive money by using their smartphone camera to scan a code.
CBA shares delivered a solid financial performance for the past 5 years. The bank performed better than the previous year, with an 8% increase in net profit after tax ($9,928 million). Moreover, the company’s earnings per share experienced stable growth and delivered a 7% increase to 559.1 cents on the previous year.
Although CBA shares cash return on equity (ROE) is 16%, which was 0.5% lower compared to last year (16.5%), CBA indicated that this was due to the 5.1 billion capital raising and still has the strongest ROE amongst its peers.
Commonwealth Banks main domestic peers are Australia and New Zealand Banking Group Ltd. (ASX ANZ), National Australia Bank Ltd. (ASX NAB), and Westpac Banking Corp. (ASX WBC) — all rated ‘AA/A-1+’ with stable outlooks.
CBA stock EPS growth at 3.5% beat the other major domestic banks in 2017. At the time of writing, the CBA share price today had CBA’s P/E at 14.74 is slightly higher than WBC’s (13.79). This is due to the fact that Commonwealth Bank has higher quality earnings due to better technology, which allows the Commonwealth Bank share price to trade at a higher premium to the other banks but not be overpriced.
CBA shares ROE at 15.65% is higher than its peers, indicating the firm can generate higher profit with the shareholders invested capital. As for the net interest margin, Commbank earns (2.11%) the most among its peers, showing a better profit generation ability in terms of retail banking.
Commonwealth Bank of Australia’s ability to meet its debt obligations from operating earnings is the strongest amongst the big four, with the interest coverage ratio of 212%, the highest amongst its peers. Compared with CBA shares, the other three banks’ lower interest coverage ratios indicate their businesses are more vulnerable to interest payments and to increases in interest rates.
ASX CBA Mitigates Risk Through Heavy Investments In Technology And Personnel
Commonwealth Bank of Australia developed management schemes to mitigate various sources of risks in terms of technology, fluctuations in the domestic housing market and regulatory environment.
Technology related risks are caused by the innovation in the technology that is used in CBA’s daily business such as cyber-security. The firm mitigates these risks through heavy investment in innovations and alignment with technology partners.
In terms of fluctuation in the domestic housing market, Commonwealth Bank has enhanced the credit quality and control, conducting stress tests and expanding the business line to diversify the risk of its home loan portfolio to mitigate these risks.
Commonwealth Bank mitigate compliance risks through investing heavily in regulatory compliance initiatives. The company also upgraded their anti-money laundry scheme operations after been pulled up by AUSTRAC.
Challenges Ahead But Still The Strongest Of Its Peers
Commonwealth Bank shares may be affected by the uncertainty of potential penalties caused by the civil case as well as penalties and regulations coming from the banking commission. Any negative news from this case and from the royal commission could hurt the CBA share price.
However, based on the fact that Commonwealth bank shares has beaten its peers in terms of its profitability such as higher ROE and EPS growth in last financial year, Commonwealth Bank looks to be in a stronger position than the other major banks.
If you don’t want to own Commonweath Bank shares directly, you can sell Put Options to gain exposure to CBA share price upside.
Disclosure: MF & Co. Asset Management and the author own CBA stock.
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This is general advice only. MF & Co Asset Management has not considered your personal financial needs, objectives or current situation. This information is not an offer, solicitation, or a recommendation for any financial product unless expressly stated. You should seek professional investment advice before making any investment decision.