One of the major drags on the S&P/ASX 200 index on Monday has been the Commonwealth Bank of Australia (ASX: CBA) share price.
The banking giant’s shares fell 3% to $73.09 in morning trade following the release of its third quarter update.
What happened in the third quarter?
In the third quarter the bank reported a 4% decline in operating income compared with the average of the previous two quarters. Management advised that this reflected a combination of seasonal impacts, temporary headwinds, and rebased fee income driven by the bank’s Better Customer Outcomes program.
Operating expenses increased 1% excluding notable items, or 24% including additional customer remediation provisions and notable items.
This ultimately led to the bank reporting a 28% decline in cash earnings compared to the average over the previous two quarters.
A good portion of this decline was caused by $714 million in pre-tax ($500 million post tax) customer remediation provisions. Excluding one-offs, the bank posted a 9% decline in underlying cash profit for the quarter.
Also weighing on the bank’s shares today was its loan impairment expense (LIE) metric. According to the update, CBA’s LIE came in at $314 million for the quarter, equating to 17 basis points of Gross Loans and Acceptances. This was 9% higher than the average for the previous two quarters.
The banks advised that “some pockets of stress remain apparent, with higher levels of consumer arrears and corporate troublesome and impaired assets in the quarter.”
One positive was that the bank’s capital position remains sound. Although CBA finished the period with a CET1 ratio of 10.3%, it expects a 120-basis point increase in its CET1 ratio in the second half of calendar year 2019 once it has completed the divestment of a number of businesses.
Should you buy the dip?
This clearly was a disappointing quarter for CBA and I’m not surprised to see its shares tumble lower today.
But things will inevitably improve in the medium term, which could make it worth buying its shares on today’s weakness with a long term view.
But if you don't like the banks then here is a dividend share which was recently rated as the best on the market.
For a brief time, The Motley Fool Australia is giving away some of its most valuable research of the entire year. Simply by clicking the link below, you’re invited to discover our #1 absolute favourite dividend share to potentially profit inside the next 12 months (and beyond).
HINT: This is an ‘under the radar’ company boasting in a mouth-watering combo of GROWTH potential and FULLY FRANKED DIVIDENDS. Yet chances are you don’t know the name or the code. And perhaps you’d like to peek at our full investment analysis too, including all the reasons we expect this company to soar in 2019?
To get your access before it’s too late, simply click below now. Your copy is free, but this valuable report will NOT be available forever...
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.