All eyes will be on Commonwealth Bank of Australia (ASX: CBA) this week with Australia's largest bank tipped to announce a record interim profit when it reports on Wednesday.
Investors have pushed the bank's stock to new all-time highs and will be hoping for a half-year profit of $4.56 billion, according to the Fairfax press, which compares to the $4.2 billion it reported in the first half of 2014. This could also pave the way for a $2.00 per share interim dividend, which would reflect a 9% increase on the $1.83 paid to shareholders last year.
It is expected that a number of factors will play in the bank's favour, including lower bad debt charges and a pick-up in credit growth. Meanwhile, the big four banks have also made significant cuts to the interest paid on term deposits which should also provide a decent boost for earnings.
As it stands, Commonwealth Bank shares are trading at $92.98, giving the company a market capitalisation over $150 billion. At that price, the stock is trading on a projected price-earnings multiple of 16.5 times, making it one of the most expensive bank stocks in the world – and far more expensive than any of its three major rivals.
As such, investors will be extremely critical of the bank's performance for its first-half operations. Rather than simply focusing on the profit result however, investors will also be looking at factors such as the bank's net interest margin (the profit it makes on its loans) as well as any move the bank might make that would indicate it is concerned about its level of capital in response to the financial system inquiry late last year. This could indicate either slower dividend growth or perhaps a dilution of shareholders' equity in the future, neither of which would sit particularly well with investors.
Regardless of the result however, Commonwealth Bank presents as a very expensive investment prospect and investors would be wise to look at some of the market's other compelling opportunities.
