CBA (ASX:CBA) share price on watch after smashing first half estimates

This banking giant had a stronger than expected half…

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Image Source: Commonwealth Bank

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Key points

  • CBA has delivered its half year results and reported strong growth over the prior corresponding period
  • Australia's largest bank posted a cash profit well-ahead of the market's expectations
  • This has allowed the bank to increase its dividend and announce a new $2 billion share buyback

The Commonwealth Bank of Australia (ASX: CBA) share price will be on watch this morning.

This follows the release of the banking giant's half year results.

CBA share price on watch after outperforming expectations

  • Statutory net profit after tax up 26% to $4,741 million
  • Cash net profit after tax up 23% to $4,746 million
  •  Operating expenses down 0.1% from $5,591 million in 1H21 to $5,588 million in 1H22
  • Fully franked interim dividend up 17% to $1.75 per share
  • Net interest margin (NIM) down 14 basis points to 1.92%
  • CET1 ratio of 11.8%
  • On-market buyback of up to $2 billion

What happened during the half?

For the six months ended 31 December, Commonwealth Bank reported a 23% increase in cash profit after tax to $4,746 million. Management advised that its profits were supported by strong business outcomes, reduced remediation costs, and lower loan loss provisions due to an improved economic outlook.

One thing that did weigh on its profits was its NIM, which fell 14 basis points over the prior corresponding period to 1.92%. CBA's NIM was impacted by increased switching to lower margin fixed home loans, the impact of the rising swap rates due to market expectations of higher interest rates, and continued pressure from home loan competition.

Nevertheless, this couldn't stop Australia's largest bank from delivering a half year profit ahead of the consensus estimate of approximately $4,500 million. This could bode well for the CBA share price today.

In light of this strong form, the CBA board declared a fully franked interim dividend of $1.75 per share. This was up 17% from the same period last year but slightly below the market consensus estimate of $1.813 per share.

But offsetting the slight dividend disappointment is news that CBA plans to follow up its $6 billion off-market share buyback with an additional $2 billion on-market buyback. The bank revealed that this reflects its strong capital position, which creates flexibility to support customers and manage ongoing uncertainties, while continuing to return surplus capital to shareholders. This buyback is expected to reduce CBA's CET1 capital ratio by approximately 42 basis points to 11.4%.

Management commentary

CBA's Chief Executive Officer, Matt Comyn, commented: "The Bank has delivered a strong financial result in a low rate environment. This has been achieved through continued customer focus and disciplined operational execution. Higher cash profits were a result of continued volume growth across the business in home lending, business lending and deposits, flat operating costs and significantly lower loan impairment expense due to the improving economic outlook."

"A highlight of the result is our continued capital and balance sheet strength. Our disciplined and balanced approach to capital optimises growth, reinvestment and shareholder returns. This has allowed us to return excess capital to our shareholders and lower our share count while remaining strongly capitalised and provisioned. We retain flexibility to provide further support to our customers and communities," he added.

While no guidance has been given for the second half, Mr Comyn appears cautiously optimistic on the future.

He said: "We expect the Australian economy to have a strong year in 2022 despite early challenges from the Omicron strain of COVID-19. Both the unemployment rate and the underemployment rate are at the lowest since 2008, with high participation rates."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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