Commonwealth Bank of Australia (ASX: CBA) shares are having a rough day.
On Wednesday afternoon, the banking giant's shares are down 10% to $154.71.
That follows the release of its third-quarter results this morning.
However, I would be careful about blaming the entire move on the result itself. The broader market is also under pressure, and investors may still be digesting the Federal Budget and what it means for banks, households, housing, and the economy.
Even so, CBA's result is the main event today. And while the share price reaction is sharp, I do not think the update changes the business' long-term quality.
Here are my three key takeaways.
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CBA's profit result was steady, not spectacular
The first takeaway is that CBA continues to perform solidly, even if this was not a result that was likely to excite the market.
The bank reported unaudited cash net profit after tax of approximately $2.7 billion for the quarter. This was down 1% on the average quarterly profit from the first half, but up 4% on the prior corresponding period.
Operating income was flat for the quarter, with lending and deposit volume growth offsetting the impact of two fewer days. CBA also noted that its underlying net interest margin was broadly stable, excluding non-recurring tailwinds.
I think this is a reasonable performance in a tougher environment.
Banks are dealing with competition in mortgages and business lending, higher funding costs, more cautious consumers, and rising macroeconomic uncertainty. Against that backdrop, a stable underlying margin and modest profit growth compared with last year are not bad outcomes.
The challenge is valuation.
CBA shares were priced for a lot of good news before today's fall. So, a steady update may not have been enough to satisfy investors after such a strong run.
Credit quality is still sound, but caution is rising
The second takeaway is that CBA is preparing for a tougher economic backdrop.
Loan impairment expense was $316 million for the quarter, and the bank increased the forward-looking component of collective provisions by $200 million. Management said this reflected revised macroeconomic forecasts and a higher weighting to its downside scenario.
That is worth watching.
CBA also reported that consumer arrears and corporate troublesome and non-performing exposures increased during the quarter. Home loan and credit card arrears rose modestly due to seasonality, while personal loan arrears increased by 30 basis points.
I do not see this as a reason to panic.
The bank said underlying portfolio credit quality remains sound, actual losses remained low, and provision coverage remains strong.
But it does show that CBA is not operating in a risk-free environment.
Higher energy prices, interest rates, and supply chain disruption are all putting pressure on households and businesses. If those pressures last longer than expected, investors may need to be more patient.
The balance sheet remains a major strength
The third takeaway is the strength of CBA's balance sheet.
This is still one of the main reasons I rate the bank so highly.
CBA finished the quarter with a customer deposit funding ratio of 79%, a liquidity coverage ratio of 133%, and a net stable funding ratio of 116%. Its CET1 capital ratio was 11.6%, which remains comfortably above APRA's minimum requirement of 10.25%.
That gives the bank flexibility.
It can keep supporting customers, funding growth, paying dividends, and absorbing shocks from a more uncertain economy.
CBA also noted that it paid $3.9 billion in dividends during the quarter, benefiting more than 800,000 direct shareholders and more than 14 million Australians through superannuation.
That reminds investors why the stock remains so popular.
Foolish Takeaway
CBA shares are down heavily today, and I can understand why some investors may want to pause before buying.
The result was solid, but the valuation was high, the broader market is weak, and the economic backdrop has become more complicated.
That said, I still think CBA is a very high-quality ASX bank.
It has a strong balance sheet, deep customer relationships, a powerful deposit franchise, and a long record of rewarding shareholders.
For me, the sharp fall does not make CBA a bad business. But after such a big move, I would be inclined to let the dust settle before rushing in.
