What to watch when Commonwealth Bank of Australia reports

Commonwealth Bank of Australia (ASX: CBA) is expected to report a record full-year profit when it reports its earnings results on Wednesday.

According to The Sydney Morning Herald, Australia’s biggest bank by market value is tipped to report a profit of roughly $9.48 billion. That compares to the group’s cash profit of $9.14 billion in the 2015 financial year (FY15) – suggesting growth of 3.7% — compared to the 5% growth recorded in FY15 over FY14.

However, the estimate also compares to a cash profit of $4.8 billion in the first-half of the year, indicating a weaker second-half.

What it means for investors

To begin with, Commonwealth Bank’s results will also reflect on its three main rivals, being Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).

The trio operate on a different reporting calendar to Commonwealth Bank, so will not announce their full-year results this month, but it will at least give analysts and investors a more realistic idea of what to expect when they do report.

Meanwhile, earnings of $9.48 billion would equate to $5.54 in earnings per share. It’s considered likely that the bank will maintain its final dividend at $2.22 per share, fully franked, bringing its total to $4.20 for the year.

The dividend would thus be unchanged since FY15 as the bank contends with the need to raise its capital reserves, consistent with requirements set by the Australian Prudential Regulation Authority.

No guarantees…

Commonwealth Bank is one of Australia’s most widely followed businesses. Thus, there is more data available to investors for Commonwealth Bank, meaning that analysts tend to be closer with their estimates than they are for many other businesses on the ASX.

However, that does not guarantee accuracy. According to The SMH, some analysts, including Bell Potter’s TS Lim, believe the second-half of the year may produce a somewhat worse result than is being forecast by most analysts, suggesting a full-year result of $9.37 billion is more likely.

Like its major rivals, Commonwealth Bank has benefited from falling interest rates, growth in loans and booming house prices. However, the benefits from those trends are diminishing while margins on loans written are also becoming increasingly narrow. This is likely to also be a key focus of investors reading through the results on Wednesday.

Investor Takeaway

Regardless of whether Commonwealth Bank reports a cash profit of $9.48 billion or $9.37 billion or anywhere in-between, it’s still likely to report a record result. While that is already anticipated, the market’s reaction will be based on how strongly the bank performed in the second half, and whether they believe conditions will improve or worsen in FY17.

The bank’s shares have gained 1.3% to $77.10 this morning, but remain well below their high levels from last year. While some investors will find the bank’s dividend yield and discount to historic highs too much to ignore, it’s worth remembering that earnings growth will likely become increasingly difficult to come by, while dividends could also remain stagnant for some time as well. As such, I think there are better opportunities presenting themselves to investors right now than Commonwealth Bank of Australia shares.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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