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Commonwealth Bank of Australia reports record profit, but are its shares a buy?

Commonwealth Bank of Australia (ASX: CBA) has become the first of Australia’s major banks to report their earnings results for the 2016 financial year (FY16) this morning.

The bank reported a 3% lift in cash net profit after tax (NPAT) to $9.45 billion – a record amount for any of the country’s big four banks. It was, however, slightly below consensus forecasts, with The Sydney Morning Herald recently reporting expectations of $9.48 billion. Still, it was considerably better than the $9.37 billion forecast by Bell Potter’s TS Lim.

Cash earnings of $5.55 was also recorded, although that was actually down on last year’s $5.608 cash earnings per share. Cash return on equity (ROE) was also lower than last year’s 18.2% at 16.5%.

These declines were largely a result of the capital raising undertaken by the bank in 2015, called for by the Australian Prudential Regulation Authority (APRA) which required the banks to improve their levels of capital held in reserve.

Meanwhile, Commonwealth Bank’s net interest margin (NIM) fell 2 basis points to 2.07%. While the major banks have benefited from the low-interest rate environment (in that there has also been growth in borrowing), low interest rates have also led to heightened competition for new customers which is dragging on the profits actually recorded on those loans. That is part of what the NIM shows us.

Commonwealth Bank also reported a 27% increase in loan impairment expense, which it blamed predominantly on its exposure to dairy as well as the resource and commodities sectors. This was consistent with Australia and New Zealand Banking Group’s (ASX: ANZ) update for the first nine months of its financial year, which has also recorded an increase in provisions in 2016.

In saying that, Commonwealth bank’s bad loan impairments remain at just 0.19% of its total portfolio – but have been rising.

Given its status as one of Australia’s most prominent blue-chips, investors are also interested in Commonwealth Bank’s dividend. It will pay shareholders a dividend of $2.22 per share, fully franked, which is the same as the final dividend it declared last year. In total, it will pay shareholders $4.20 per share for FY16, fully franked, which equates to a yield of 5.3% at today’s share price – or 7.6% grossed.

Although Commonwealth Bank’s shares have fallen heavily since the heights achieved in 2015, the bank is still facing a number of strong headwinds. Of course, the shares could rise from here, but there seems to be limited upside potential with plenty of downside risk. As such, I think investors could do better than buying Commonwealth Bank of Australia shares today.

If you're looking for other great blue-chip investment ideas, and aren't so keen on the banks, I'd suggest checking out these three companies instead. They could be a great idea for investors wanting to stick with familiar businesses whilst still going for growth and income.

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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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