The Commonwealth Bank of Australia (ASX: CBA) share price will be in focus today as our largest ASX-listed bank released its quarterly update that will give shareholders a few things to worry about.
The CBA share price has been outperforming the market over the past month as we headed into the bank reporting season with a gain of 4.4% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index inched up 1%.
Other big banks have rallied just as hard with the Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price chalking up similar gains.
CBA big impairment and profit hit
CBA took a big profit hit in 3QFY19 as it made a $714 million provision to compensate aggrieved customers and that meant its cash profit for the period crashed 28% compared to the average of the first two quarters of the financial year. Even if one-off costs were excluded, underlying cash profit is still down a considerable 9%.
Perhaps analysts won't be too fazed by the news as consensus underlying earnings per share forecast for FY19 is tipped to drop around 8% from the previous year.
The big new provision takes the total amount CBA has set aside for wronging customers to over $2 billion. This is the fallout from the Hayne Royal Commission, which exposed unethical and sometimes illegal activities by our largest financial institutions.
Loan book still growing
The bank's chief executive Matt Comyn is also putting on a brave face as he touted CBA's "sound business fundamentals" and said "momentum [has been] maintained in a challenging operating environment".
After all, CBA has managed to lift the number of home loans its written by 2.5% in the quarter, which implies it's holding on to its market leading position. The volume of new business loans also increased by 2.3% and household deposits were up 2.8%.
However, no word on whether the size of more mortgages is shrinking in light of tighter lending conditions and consumer arrears (past 90 days) are ticking up, although its coming from a low base and credit quality still looks good for the bank – at least for now.
Are CBA's dividend safe?
Investors may also be concerned to see the bank's capital adequacy ratio fall in the period. The Common Equity Tier-1 (CET1) ratio dipped to 10.3% from 10.8% after the interim dividend payment to shareholders were deducted.
This may prompt some bank bears to think that CBA dividends can't be banked on. So far, only NAB has cut dividends and its share price has reacted positively to the news – a fact that won't be lost on its rivals and may prompt some boards to follow.
What's clear from the results is that the big banks need a rate cut or two from the Reserve Bank of Australia (RBA) as badly as stretched consumers.
The probability of rate cuts is high and it's more a question of "when", not "if". This makes me think that bank stocks may have found their footing even though the operating environment is likely to stay hostile until 2020.
