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Why the Commonwealth Bank share price is the best buy among the Big 4 banks

The Commonwealth Bank of Australia (ASX: CBA) may emerge from the coronavirus pandemic as the best bank to invest in among its Big 4 cohorts: Australia and New Zealand Banking Group Limited (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).

Could it be the big four bank to buy? 

No deferred dividend or capital raising 

CBA’s strong capital position enabled the bank to deliver 1H20 interim dividend of $2.00 per share or $3.5 billion to its ~830,000 shareholders. A much-needed cash benefit to the economy. 

Comparing this to the likes of Westpac and ANZ, which both deferred their interim dividend, and NAB, which offered its existing shareholders more capital in its $3.5 billion capital raising yet still opted to pay them a small interim dividend. 

Despite paying $3.5 million in dividends, Commonwealth Bank was still able to maintain a March CET1 (Common Equity Tier 1) ratio of 10.7% above APRA’s ‘unquestionably strong’ benchmark of 10.5%, notwithstanding the timing of the 1H20 dividend payment and additional COVID-19 and remediation provisions. 

I believe Commonwealth Bank’s commitment to paying a dividend in today’s uncertain climate – without having to raise additional capital, while also meeting APRA’s stringent capital requirements – is a reflection of its position as the leading big four bank. 

Sturdy relative earnings

Commonwealth Bank demonstrated relatively sturdy earnings compared to its peers. Cash net profit after tax for the big four banks in comparison to 1H19 was:

  • CBA down 44% 
  • Westpac down 70%
  • NAB down 51.4%
  • ANZ down 60%

Commonwealth Bank is well placed to manage the challenging market conditions, with strong balance sheet settings and a favourable business mix. The group is 70% deposit funded, underpinned by the bank’s peer lending franchise strength in stable household deposits. Deposit balances grew strongly in Q3, influenced by growth in retail/SME deposits and corporate clients drawing down on funding lines and placing these funds into CBA deposits for liquidity purposes. 

Is it a buy?

There are a number of risks and scenarios that could play out following COVID-19. Commonwealth Bank’s report outlines key drivers in the housing market including unemployment, underemployment, changes to income and house prices.

Government assistance programs such as the JobKeeper scheme have been able to prop up the economy and employment levels. However, the implicit end of JobKeeper combined with structural changes in Australian sectors and ongoing China trade tensions could see economic conditions worsen. Despite a potentially weaker economic outlook, I would still consider Commonwealth Bank the better of the big four banks, given its earnings and commitment to dividends. 

While banks have traditionally been the 'go to' shares to hold for dividends, check out our free report for ASX200 shares that have been able to grow earnings amidst the coronavirus for safe and reliable dividends.

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Motley Fool contributor Lina Lim has no position in any of the 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 Scott Phillips.