Commonwealth Bank of Australia smashes earnings records: Here’s what you need to know

Commonwealth Bank of Australia (ASX: CBA) has started its financial year with a bang, recording a massive cash profit of $2.3 billion for its first quarter operations, up from $2.1 billion a year ago. That equates to a 9.5% jump, year-over-year while it also puts it on track to smash last year’s record annual profit of $8.8 billion.

Meanwhile, net profit for Australia’s largest bank rose by 14% for the three months to end at $2.4 billion.

The result was underpinned by a further decline in bad and doubtful debt charges, thanks in large part, to Australia’s low interest rate environment. The bank’s total impairment expense was $198 million (down from $228 million last year) while impaired assets were lower at $3.1 billion.

The bank also recognised strong new business levels in home lending, although its net interest margin (a measure of profitability on its loans) was reported as “marginally lower”. This was also experienced by Commonwealth Bank’s primary rivals, being Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB). This is as a result of aggressive competitive measures to win over new customers.

Here are some of the other key takeaways from today’s report:

  • Bankwest’s profitability continued to be supported by cost discipline
  • CBA’s funding and liquidity positions remain strong, with liquid assets of $145 billion and customer funding at 63%
  • $12 billion of new term issuance in the quarter
  • Basel III CET1 (APRA) ratio was 8.6%, down from 9.3% at the end of June
  • Household deposit growth continued in the quarter, with the group growing slightly ahead of system
  • Assets under management grew by 3.5% over the quarter, driven by net flows and investment performance

Should you buy?

Considering the bank’s record-smashing quarter, you might be wondering why on earth the shares are actually trading lower today? While they rose earlier in the day, they have since slipped 0.4% and are trading at $80.43.

The likely reason why the shares are trading lower relates to two factors, being the bank’s excessive valuation, and its source of growth. Firstly, it should be noted that Commonwealth Bank’s shares, like those of its big four peers, are currently trading on an expensive premium. While a P/E ratio of 15.2 times earnings is justifiable for companies with strong growth prospects, it’s very pricey for such a large corporation with more limited growth capabilities. With that in mind, it’s likely that investors are also becoming concerned by the fact that profits are being driven largely by falling bad debts, rather than income growth.

The big four banks have done wonders for investors' portfolios in recent years, but given their limited growth prospects, they remain far too expensive at today's prices. Luckily, there are other high-yield stocks still trading at very appealing prices, including the one our top investment advisor has just named The Motley Fool's #1 Dividend Stock for 2014 - 2015.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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