Australia's largest listed bank showed why it's the premium pick among ASX big bank stocks.
The Commonwealth Bank of Australia (ASX: CBA) issued its quarterly results this morning, which on the surface contained some disturbing pieces of news.
But if you scratched beneath the surface, there was plenty to like about the update that also contained clues about the bank's dividends.
Ignore the bad news
As mentioned, you'd need to look past some of the disturbing news to get to the good stuff. The things investors may not like to hear about included a 23% crash in cash profit of $1.3 billion for the March quarter.
The bank also set aside $1.5 billion in additional provisions due to the COVID-19 crisis and warned that house prices could collapse by up to 32% under its worst case scenario.
But the update also reinforced my view that investors should be overweight on CBA relative to the other big three banks.
CBA's dividend safer than peers
For one, I think CBA won't be cutting its dividend nearly as much as its peers when it reports its full year results in August.
While there're multiple earnings headwinds beating down on CBA, the bank's CET1 ratio stands at 10.7%. Even after it paid more than $3.5 billion in interim dividends, its regulatory cash buffer is still comfortably above the 10.5% "unquestionably strong" level set by our banking regulator APRA.
What's more, CBA now has an extra $1.7 billion to play with as it sold a 55% stake in its wealth manager Colonial First State to private equity group KKR.
Stronger balance sheet
What this means, in my mind, is that CBA's management will have little excuse to make a dramatic chop to its dividend.
This sets the bank apart from its peers. Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) suspended dividends when they reported their interim results to keep their CET1 ratios at acceptable levels.
National Australia Bank Ltd. (ASX: NAB) went a step further and launched a $3.5 billion capital raise and slashed its interim dividend by two-thirds to 30 cents a share.
Worth paying for
There were concerns that CBA's results will be equally as bad as its peers, but the most expensive big bank stock proved the adage "you get what you pay for".
The more than halving in profits at the other big banks makes CBA's 23% earnings decline look like a profit upgrade!
As inappropriate as it sounds during this coronavirus pandemic, experience taught me it's often better to cough up for quality, especially during a crisis.
The only bank stock that I think is better placed is Macquarie Group Ltd (ASX: MQG), but if you excluded the investment bank, CBA is clearly the standout in the sector.
