Goldman Sachs has run the ruler over Commonwealth Bank of Australia (ASX: CBA) shares after the bank released its third-quarter update this morning. By the market's close, the CBA share price was trading 1.05% higher at $95.57.
Let's take a look at what the broker had to say.
Goldman key takeaways
Cash profit ahead of expectations
Commonwealth Bank delivered a cash profit from continuing operations of $2.4 billion in the third quarter, up 85% from a year ago. The run-rating of this result came in 22% ahead of what was implied by Goldman's 2H21 forecasts.
The broker noted that the better-than-expected cash earnings were driven by significantly lower-than-expected bad and doubtful debt (BDD) issues and stronger revenues.
Despite the lower than expected BDD issues, Goldman observed that total provisions to credit risk-weighted assets (RWA) of 1.74% and pre-provision operating profits were still above its analysts' forecasts.
Net interest margins edge higher
The third-quarter update did not provide a figure regarding net interest margins (NIM) but noted that group NIM excluding markets and treasury divisions was higher.
Goldman highlights the drivers of NIM including "higher NZ earnings and favourable funding mix from at-call deposits growth and lower funding cost" which was partially offset by the "continued impact of lower rates, competitive pressures, and switching to lower margin fixed rate loans".
Above-system home loan growth
Goldman observed that Commonwealth Bank delivered above-system growth in home loans of 1.1x. This was driven by "strong funding volumes and continued focus on credit decisioning turnaround times". Business lending was even stronger at more than 3 times system and diversified across all sectors.
Better than expected capital adequacy requirements
Commonwealth Bank's CET1 ratio of 12.7% was run-rating 28 basis points ahead of Goldman forecasts. The broker pointed to factors including organic capital generation and lower total RWA driving the better-than-expected result.
As highlighted by Goldman, CBA "management also notes that the strong surplus capital position creates flexibility for the Board in its consideration of capital management initiatives with the timing of such to be dependent on a continued trend of domestic economic improvement, CBA's ongoing assessment of portfolio credit quality and regulatory guidance"
Sell rating maintained for Commonwealth Bank shares
Despite saying that the "operational trends are broadly consistent with peers and the balance sheet looks very strong", Goldman retained a sell rating for Commonwealth Bank shares and a 12-month target price of $73.64.
The broker said, "We struggle to justify the stock's relative PER rating (45% premium to peers vs. 16% 15-yr average) in light of these trends".
