What more does Commonwealth Bank of Australia (ASX: CBA) have to do to please investors?
It yesterday announced a 13% increase in net profit to a record $8.63 billion for its full year, while cash profit also ballooned out to $8.68 billion. And, as if that wasn't enough, it also lifted its dividend slightly higher than consensus to 401 cents per share, giving it a fully franked yield just under 5%.
Yet the stock still fell 0.9% to close for the day at $80.96. Shares in Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) also fell following the news release, highlighting that the results had not lived up to investors' expectations.
With shares now trading above the $81 level on a P/E multiple of 15.3, Aussie investors are likely wondering whether this is as good as it will get for Australia's largest bank. Despite a five basis point decrease in funding costs, its net interest margin (the profit it makes on loans) still stands at 2.14%, which was unchanged from the first-half as competition for new customers continued to heat up across the sector.
Another factor likely playing on investor confidence was the loan impairment figure, which relates to bad debt charges. Thanks to low interest rates, bad debt charges have been declining heavily which has had a positive impact on all of the banks' profitability.
Although Commonwealth Bank's loan impairment expense was down 12% for the year, there was a small increase in bad debts in the latest quarter. While the bank's CEO, Ian Narev, said: "We do not see that as a sign of any systemic weakness," Omkar Joshi, an analyst at Watermark Funds Management, wasn't quite as optimistic. The Australian Financial Review quoted him as saying, "we might have passed the sweet spot in the asset quality cycle and bad debt charges could start to tick up marginally from here for the industry."
Is Commonwealth Bank of Australia a buy?
The bank's results were largely in line with what the market had been expecting. However, when a stock is trading on such a high premium, as is the case with Commonwealth Bank and its major peers, investors expect them to beat consensus estimates.
While I certainly couldn't question the high quality that is Commonwealth Bank, I believe the shares have rallied so high in price that they no longer present as a compelling buy. In fact, given the bank's high valuation, I believe the shares will likely drop in price in the near-to-medium terms – particularly if its three major rivals also fail to exceed expectations when they report later in the month.
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