The Commonwealth Bank of Australia (ASX: CBA) share price has fallen 2.6% following the release of its third quarter financial update.
Here are the key takeaways from CBA's brief market update:
- Cash profit was $2.4 billion, up from $2.3 billion last year
- Deposit funding was 67%, up from 64%
- Regulatory capital ratio came in at 9.6%, versus 10% last year
- The bank grew above-average in home and business lending
Commonwealth Bank's trading update comes on the back of the financial reports from each of its peers, including National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).
While CBA's trading update is nothing more than a look at the hood — that is, it's not even enough to be a 'look under the hood' — there were some noteworthy figures in today's update.
For example, it was pleasing to see the bank's increased CET 1 capital ratio. This is a measure of a bank's regulatory capital buffer against market shocks.
Currently, each of the major banks is bracing for further increases in the requirement to hold capital. By holding more capital now CBA is potentially lessening the blow when changes finally arrive.
Also pleasing was the fall in CBA's loan impairment expense, which fell to 0.11% of all loans, down from 0.17% last half. Lower impairment expenses mean that fewer customers are already behind on repayments.
However, looking ahead, to what causes loan impairment expenses to arise; the percentage of CBA's home loan customers falling more than 90 days behind on their repayments has increased to 0.57% of all loans, as can be seen in this graph.
The bank attributed the result to weaker conditions in Western Australia.
Another concern may be a potential fall in profit margins. The bank alluded to margin pressures, citing competition and funding.
"Net interest income growth (pcp) supported by volume growth in key markets, offsetting margin pressures," the bank's update read.
Should you buy CBA shares?
If there are two things to take from recent bank results, it is that competition is only getting fiercer and the banking system has plenty of headwinds (e.g. competition, rising funding costs, increased regulatory pressures and slowing house prices), in my opinion.
Altogether, it means investors should demand a healthy discount on the value of bank shares, before buying. In other words, given all the risks, you should buy bank shares for significantly less than what they are worth to compensate for the potential downside. In my opinion, CBA shares are expensive. Therefore, I am not a buyer at today's prices.
