The Commonwealth Bank of Australia (ASX: CBA) share price lifted almost 3% last Wednesday following its resilient first quarter FY21 results.
First quarter results recap
Considering the response from brokers, CBA delivered a fair result. Its home loan growth grew twice as much as the wider banking system, benefiting from higher application volumes and a continued focus on credit decision turnaround times. The domestic business lending growth was also above system, with solid growth across diversified sectors. Its strong operational performance helped offset ongoing margin pressures due to lower interest rates. Its unaudited cash net profit after tax was $1.8 billion for the quarter, down 16% on the prior corresponding period.
The bank’s CET1 ratio was 12.1% as at 30 September, significantly above APRA’s ‘unquestionably strong’ benchmark of 10.5% and well in excess of the prudential minimum of 8%. This compares to the rest of the big four banks which currently maintain CET1 ratios between 11.13%–11.47%.
What do the economic indicators suggest?
Economic indicators relevant for businesses, consumers and property suggest that the worst is behind us.
Australia’s November consumer confidence hit seven-year highs as consumers are more optimistic about the economy with the coronavirus pandemic now largely under control. The Westpac-Melbourne Institute index of consumer sentiment was tracking at 107.7 in November, 11% higher than its level a year ago.
Similarly, in October, the Roy Morgan Business Confidence index jumped 13.1 points or 15.3% to 98.7, the highest monthly reading for more than 8 months since February 2020. The recovery in business confidence in October means the index has performed an unprecedented near-perfect ‘W’ pattern over the last 9 months.
Auction clearance rates have been consistently strong around Australia, perhaps reflective of the recent strength in the REA Group Limited (ASX: REA) share price. This has been supported of course by the RBA’s recent interest rate cut and the ‘guarantee’ of rates remaining low for at least 3 years.
Bank loan deferrals have been consistently falling. In the case of CBA, as at 31 October, approximately 46,000 home loans remained in deferral down from 125,000 loans in June 2020.
Macquarie raised its CBA share price target from $58.50 to $65.00 and retained its underperform rating. It likes the bank’s balance sheet strength, improvement in deferrals but risks remain with respect to lower margins.
Similarly, Jefferies raised its CBA share price target from $52.85 to $75.50. It reacted positively to the bank’s quarterly trading update and upgrades its rating from underperform to hold.