Commonwealth Bank of Australia (ASX: CBA) has achieved a better-than-expected cash net profit after tax (NPAT) result for the six-months ended 31 December 2015, while it also elected to keep its interim dividend unchanged.
Statutory NPAT rose 2% compared to the prior corresponding period (pcp) to $4.62 billion, but the cash NPAT, which the banks prefer to focus on, rose 4% to $4.8 billion. That was better than the estimate of slightly higher than $4.7 billion cash NPAT, according to The Sydney Morning Herald.
Although the bank's loan impairment expense rose 3%, its loan loss ratio remained steady at 17 basis points. Its net interest margin, which reflects the measure of profitability on its loans, also remained flat at 2.06%.
While cash NPAT rose 4%, cash earnings per share (EPS) only rose 1% to $2.84. EPS grew at a slower pace than cash NPAT itself because of the bank's $5.1 billion capital raising late last year which came as a result of the Australian Prudential Regulation Authority's (APRA) tightened capital measures.
Ensuring the banks hold more capital against the loans they write, these regulations were designed to protect the banks (together with shareholders and taxpayers) in the event of another major economic downturn.
However, the capital raising also had an impact on the group's Return on Equity (ROE) – a key performance measure for the banks – which fell 140 basis points to 17.2%. The bank also kept its interim dividend unchanged at $1.98, representing a payout ratio of 70.8% of cash NPAT.
Indeed, there had been much speculation regarding the dividend leading into today's announcement – particularly following speculation that both Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) may need to cut their own dividends.
Some estimates suggested Commonwealth Bank's dividend could fall to $1.88 per share, while others said it could rise to $2.02. Instead, it chose to leave it on hold for the first time since the Global Financial Crisis in 2009.
Meanwhile, Commonwealth Bank said it strengthened its balance sheet during the first half, increasing its Basel III Common Equity Tier 1 (CET1) capital by 100 basis points to 10.2% on an APRA basis. This puts the group in the top quartile of banks globally for capital adequacy.
The Outlook
Although Australia's biggest banks have generated fantastic returns for investors over the years, they are still cyclical in nature. The economy is now facing a number of strong headwinds, exacerbated by the slowdown in mining, which could hinder the banks' ability to continue growing earnings in the near-term and thus impact the potential for shares to continue rising.
However, CBA's CEO, Ian Narev, said that the results showed the local economy had maintained its steady transition as it adjusts to slowing investment in the mining sector, while "sound monetary policy and a lower Australian dollar" were also providing a boost for the economy. He also noted that global volatility warrants caution, but that overreaction is also a threat.
Foolish takeaway
Commonwealth Bank's share price plummeted more than 4% on Tuesday, wiping billions of dollars from its market value. It is down 14.8% since the beginning of the year and 24% since peaking nearly 12 months ago.
Commonwealth Bank is a great business, and one I would happily add to my portfolio – but only for the right price and at the right time. At its current price, I think there are far better opportunities for investors to consider instead.
