Last week, Commonwealth Bank of Australia (ASX: CBA) saw its share price rise 8.11%, more than any other of the big four banks. Furthermore, the Australian Prudential Regulation Authority (APRA) announced it was reducing the bank’s capital charge by 50%. This means that Commbank has to hold $500 million less capital as risk mitigation. This helped the CBA share price to rise by 1.43% on Friday alone.
In other positive news, APRA has indicated it may also remove the cap on bank dividend payments. Additionally, Commbank CEO, Matt Comyn, noted last week that the housing slump risk to the economy had passed. A combination of factors fuelled the CEO’s optimism. These included strong surplus savings of $100 billion, very strong housing application figures, and robust consumer confidence.
Adding to this is the motivation for house buyers, with the Reserve Bank of Australia (RBA) recently reducing interest rates to historically low levels. Lastly, the government proposes to relax responsible lending laws. With all of these factors at play, could the CBA share price be headed into calmer waters? There are, however, challengers in the mortgage space.
Challenges facing the CBA share price
Into the mix of factors that could possibly impact the CBA share price, is the planned IPO of one of Australia’s leading non-bank lenders, Liberty Financial Group. Started in 1997, Liberty boasted an $11.7 billion loan book at 30 June. In addition, Liberty delivers a stronger return on assets than any of its bank or non-bank lending counterparts.
Credit Suisse Group (NYSE: CS) is expected to manage the institutional book build, floating 20% of Liberty’s value on the ASX at a price of $363 million. This values Liberty at approximately $1.815 billion with a price-to-earnings (P/E) ratio of 11 times the lender’s forecast net profit after tax and amortisation (NPATA). This P/E is lower than any other ASX listed non-bank lender.
For instance, non-bank lender Resimac Group Ltd (ASX: RMC) has seen its share price rise by nearly 45% in the past month. It is currently trading at a P/E of 14.47. Stablemate MyState Limited (ASX: MYS) has seen an almost 22% rise in its share price over the past month and has a current P/E of 15.13. Meanwhile, sector minnow, Auswide Bank Ltd (ASX: ABA), has seen a 19.6% rise in its share price over the same period, and trades at a P/E of 13.65.
Does the CBA share price have a moat?
A moat is Warren Buffet’s term for an unassailable competitive advantage, invoking an image of a medieval fortress. And in the case of the CBA share price, one could argue it does have a moat against its non-bank lending counterparts.
First is the manner in which all companies obtain capital to lend. Non banks rely on a range of mechanisms. In the case of Resimac, for instance, it uses low interest warehouse funding for short-term capital and a global securitisation program for long-term funding.
Securitisation is where the company will add together dozens, if not hundreds, of mortgages and float them on the debt markets. Resimac has been a regular issuer of Residential Mortgage-Backed Securities (RMBS) since 1987. Currently, it pay 130 basis points, or 1.3% for capital it secures in this manner.
Commbank, however, is able to secure capital at far lower rates. For example, CBA is an authorised deposit-taking institution. It takes in deposits and loans them out at higher interest rates. This is the core of the bank’s business model.
Second, banks have access to the Reserve Bank of Australia’s (RBA) $200 billion term funding facility (TFF). This is a facility that provides banks access to funds at the very low current cash rate of 0.1%. This is 1.2% lower than a lender like Resimac can access.
Outside of consumer lending, Commbank has a range of other products and service lines that provide it with additional revenue streams and help to set it apart from some of its competitors. For example, Commbank is the largest digital payments provider in the country. Secondly, it owns 50% of the Klarna buy now, pay later platform in Australia and new Zealand.
Despite looming competition in the mortgage sector, the CBA share price appears to have some notable tailwinds. The APRA changes on capital holdings and potential dividend caps are a positive development, as is the uptick in the housing market CEO, Matt Comyn, has observed. But ultimately, could it be the bank’s access to low priced capital that helps set it apart from the rising tide of non-bank lenders? Only time will tell.