Is the CBA (ASX: CBA) share price a buy during COVID-19 after revealing its third quarter update?
What is CBA?
CBA is Australia’s largest bank, with commanding market share of mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
CBA’s COVID-19 Quarter
Australia’s biggest bank announced that it has added an additional loan loss provision of $1.5 billion for the potential impact of COVID-19 on customers. The expected pain from COVID-19 is a big reason why the CBA share price has fallen so hard since February 2020.
CBA said it’s focused on doing everything it can to support Australia in these challenging times.
So far its support has seen $9 billion of support to around 100,000 businesses, repayment deferrals on approximately 240,000 loans, reduced interest rates for borrowers, increased interest rates for depositors and waived fees & charges.
In terms of profit, it generated $1.3 billion of statutory net profit of approximately $1.3 billion in the quarter. Cash profit from continuing operations was also $1.3 billion. Operating income was flat. Operating expenses, excluding notable items, was down 1%.
The reported cash net profit was down 44% compared to the average quarter profit from the first half of FY20. The CBA share price is likely to follow earnings over the longer term.
After the payment of FY20 interim dividend and the COVID-19 provision CBA had a CET1 ratio of 10.7%, which is still ‘unquestionably strong’ using APRA’s measure.
Consumer arrears for personal loans and credit cards saw an uptick in the last couple of months. Troublesome and impaired assets increased from $7.8 billion at December 2019 to $8.1 billion at March 2020.
CBA also said there was additional wealth and banking customer remediation provisions and program costs of $135 million.
CBA asset sale
The major bank has announced it has entered into an agreement to sell a 55% stake of Colonial First State (CFS) to KKR, which is a global investment firm.
The whole transaction values CFS at $3.3 billion, CBA will receive $1.7 billion from KKR. It values CFS at 15.5x CFS’ pro forma net profit of around $200 million.
The sale will result in a post-tax gain of $1.5 billion for CBA which includes the post-tax separation and transaction costs of $180 million. It will add 30 to 40 basis points (0.30% to 0.40%) to CBA’s CET1 ratio.
This is the final stage of exiting wealth management initiatives.
CBA will work with KKR and invest in CFS so that’s a successful standalone business. It intends to maintain its holding through this period.
Is the CBA share price a buy?
Investors have sent the CBA share price down 1.3%, which is about the same as the market, so this wasn’t a good or a bad response. The problem is we don’t know how bad the pain is going to be, I don’t like making investments with such a large range of potential outcomes unless they’re all positive.
CBA is seen as the highest quality bank out of the big four, so I’d buy it first before the others. But I wouldn’t expect big dividends in the next couple of years. I prefer the idea of going for growth from technology shares like these ones:
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Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.
