Commonwealth Bank of Australia (ASX: CBA) has reported its result for FY20. Its cash profit only fell by 11.3% and CBA will pay a pretty solid final dividend to shareholders. The CBA share price is up 2.5%.
CBA’s FY20 report
The bank said that its FY20 cash net profit after tax (NPAT) was $7.3 billion, down 11.3% on last year. The net profit was supported by strong business performance but impacted by higher loan impairment expenses.
It achieved home lending growth of $18.4 billion during the year, the growth rate was 1.3x the growth across the system. Household deposits increased by $25 billion, which was 9.8% higher.
CBA’s net interest margin (NIM) declined by 2 basis points (0.02%) to 2.07%. The NIM is a profit measure of the banks which shows how much money they’re making on the money they lend out (compared to the cost of it from another lender or the deposits from savers). CBA said that the NIM fell because of lower interest rates, partly offset by lower funding costs. If the NIM falls then the bank needs to grow its total loan balance by at least that percentage just to maintain its loan profits.
Operating income was up 0.8% to $23.76 billion whilst operating expense rose 0.7% to $10.9 billion – which were partly offset by lower remediation costs.
COVID-19 impacts
CBA said that 135,000 home loans, being 8% of its total accounts, were being deferred at 31 July 2020. That figure is down from the peak of 154,000. There were 59,000 business loans that were being deferred at the end of July, being 15% of the total loans, down from 86,000 at the peak.
In the third quarter update CBA provisioned $1.5 billion for COVID-19. Its total loan impairment expense increased by $1.32 billion to $2.52 billion.
Statutory profit
CBA reported that its statutory profit rose by 12.4% to $9.63 billion. This was due to gains on the sales of its divestments.
CBA dividend
There has been a lot of speculation about CBA’s dividend. The Rask Media team has been thinking about whether CBA would even pay a dividend in this result.
CBA announced a final dividend of $0.98 per share, bringing the full year dividend to $2.98 – down 31% on FY19. Not bad in the grand scheme of things. APRA had wanted banks to materially reduce their dividends to ensure their balance sheets remained strong.
The big ASX bank disclosed that its CET1 capital ratio was 11.6% at the year end. Up 0.90% on FY19 and above the ‘unquestionably strong’ benchmark of 10.5%.
CBA outlook
CBA said that Australia is relatively well positioned with significant stimulus measures, a strong pipeline of infrastructure projects with a robust outlook for mining and agriculture exports.
The ASX bank said it’s prepared for a range of economic scenarios, it’s expecting lower credit growth and low interest rates to put pressure on its revenue. It said the next few months are critical and some sectors will take longer to recover than others. But the bank is positive on the long term prospects of the country.
Summary
At the current CBA share price, which is up 2.5%, it’s valued at 18.5 times FY20’s cash earnings. It also has a fully franked FY20 dividend yield of 4%, or 5.7% including the franking credits.
CBA may have been a decent buy a few months ago, but I don’t think I could buy it today. It is my preferred big bank compared to the others, but I think its share price now fully reflects the positive trajectory of the COVID-19 situation. There are other ASX dividend shares I would prefer to buy like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which I wrote about in this article.
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