The big four ASX banks of Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) have now both reported their results. How do they compare?
How businesses perform in the same industry can indicate whether one is better value for an investor than the other.
First, let's look at the headline numbers.
Profit growth
NAB reported that it made $6.36 billion of statutory net profit, whilst cash earnings came in at $6.56 billion – growth of 76.8% on FY20. Excluding FY20 large notable items, the cash earnings increased by 38.6%.
Meanwhile, CBA made statutory net profit of $8.84 billion. Cash net profit increased 19.8% to $8.65 billion.
Whilst CBA did make a bigger profit, its profit grew at a slower rate compared to NAB.
Both banks acknowledged that economic conditions had improved and the outlook was better.
Loan impairment expense
It was large loan impairment expenses that hurt the banks in FY20 and a significant improvement in FY21 that helped profit significantly rise.
NAB said that its credit impairment charge in FY21 was a write-back of $217 million, compared to the FY20 charge of $2.76 billion. That significant improvement was due to a reduction in charges for forward-looking provisions and lower underlying charges.
Turning to CBA, its FY21 loan impairment expense was $554 million – an improvement of 78%. CBA said that this reflected improved economic conditions, though it's maintaining a "strong" provision coverage ratio of 1.63%, reflecting the continuing economic uncertainty.
Net interest margin (NIM)
The NIM is a measure of bank profitability, it shows how much profit a bank is making on lending out money, compared to the cost of funding – like deposits and bonds.
NAB said that its NIM dropped 6 basis points to 1.71%. The big four ASX bank explained that the margin was hurting from the impacts of the low interest rate environment combined with home lending competition and shift to fixed-rate lending.
Meanwhile, CBA's NIM in FY21 declined by 4 basis points to 2.03%. CBA's NIM declined less in FY21 than NAB and it's currently a higher margin.
Balance sheet strength and buy-backs
All of the big banks have seen growing levels of capital on their balance sheet, with the common equity tier 1 (CET1) capital ratios above APRA's 'unquestionably' strong level of 10.5%.
NAB said it had a CET1 ratio of 13% at September 2021. This was an increase of 153 basis points over the financial year. NAB announced at the end of July that it was going to buy back up to $2.5 billion of shares
CBA ended its FY21 with a CET1 ratio of 13.1%. CBA decided to launch a $6 billion off-market share buy-back due to its "strong capital position".
Both banks have/had large amounts of capital on their balance sheets and are using it to boost shareholder returns.
Dividends
NAB decided to pay an annual dividend of $1.27 per share, which was an increase of 112%. That currently translates to a grossed-up dividend yield of 6.1%.
CBA's dividend was increased by 17% to $3.50 per share, though it wasn't cut as much in FY20 as other banks. CBA currently has a grossed-up dividend yield of 4.6%.
NAB shares currently offers a larger dividend yield.
Are the big banks buys?
Plenty of brokers now believe that CBA shares are a sell, such as Citi with a price target of $94.50.
However, NAB ratings are largely hold/neutral with a few buy ratings. Staying with Citi, the broker is neutral on NAB with a price target of $29.50.
