FREE

CBA: Q3 2020 Results Down on Increased COVID-19 Provisions; Majority Stake Sale of CFS Announced

Commonwealth Bank of Australia (CBA or the Bank) reported unaudited net profit of approximately 1.3 billion in Q3 2020, both on a statutory and cash basis. This compares to a H1 2020 quarterly average cash net profit after tax of AUD 2.2 billion. The bottom line result was affected by AUD 1.05 billion provisions related to the COVID-19 outbreak, and AUD 95 million remediation costs, both on a post-tax basis.

Total operating income in Q3 2020 was flat on H1 quarterly average. Net interest income was supported by volume growth, despite the pressure from lower margins, however, non-interest income was down 2%.

CBA reported statutory expenses up 5% on the AUD 2,715 million H1 2020 quarterly average due to additional Wealth and Banking customer remediation provisions, and programme costs of AUD 135 million pre-tax. CBA has guided that further cost pressure in Q4 2020, and potentially in FY21, relating to COVID-19 and its impact on staffing levels is to be anticipated. Nevertheless, we note that underlying operating expenses were still down 1%, partly reflecting ongoing simplification.

CBA has taken additional credit provisions of AUD 1.5 billion, relating to the buildup of credit reserves in light of the deterioration in the economic outlook from the COVID-19 pandemic. As a result, total credit provisions stand at AUD 6.4 billion at end-March 2020. This translates into a total provision coverage over credit RWAs of 1.65%. Loan impairment expense in Q1 2020 was AUD 1.6 billion, compared to the AUD 325 million 1H 2020 quarterly average, and this equates to an annualised loan loss rate of 80 bps.

In relation to the implementation of COVID-19 relief measures, the Commonwealth of Australia's key fiscal measures include a "JobKeeper wage subsidy" to enable corporates to retain staff on lower hours, as well as a guarantee program for SMEs of up to AUD 40 billion. The Bank disclosed that it has received approximately 240,000 loan repayment deferral requests, of which 144,000 are home loans (AUD 50 billion) and 70,700 are business loans (AUD 15.2 billion).

The Group reported an APRA Common Equity Tier 1 (CET1) ratio of 10.7% at end-March 2020, down 100 bps on end-December 2019, of which 79 bps related to the H1 2020 dividend payment of AUD 3.5 billion. This is still above APRA's 10.5% ‘unquestionably strong’ CET1 benchmark, which nonetheless has been temporarily relaxed in light of the uncertainty surrounding economic activity due to the COVID-19 crisis.

Concurrently, CBA has announced an agreement to sell a 55% stake in Colonial First State, its retail superannuation and investment business (approx. AUD 135 billion funds under administration), for cash proceeds of approximately AUD 1.7 billion. The transaction is expected to result in a post-tax capital gain of AUD 1.5 billion, ultimately increasing capital levels by 30-40 bps. The transaction, which is subject to regulatory approvals is expected to be completed within the first half of calendar year 2021.

Under DBRS Morningstar's moderate macro-economic scenario ("Global Macroeconomic Scenarios: Implications for Credit Ratings", published on 16 April 2020), GDP growth in Australia falls -4.5% in 2020, with a 4% rebound in 2021 and 2.5% in 2022, while the average unemployment is estimated at 9% in 2020, 8% in 2021, and 6.5% in 2022. As a result, we expect the economic effects resulting from the coronavirus pandemic and lower interest rates will likely translate in 2020 into weaker revenues, as well as high loan loss provisions. Nevertheless, DBRS Morningstar considers CBA´s strong underlying profitability, solid capital levels, and sound asset quality metrics, as adequate mitigating factors.