Current Price: ~$165.00 | Target Price: $167.50 | May 03, 2025
Of course, having a relevant share price is crucial, but due some constraints for the moment, I opted (early on) to omit recent share prices on ASX-listed stocks. However, I failed to think about its impact on readers, something I'll keep in mind going forward.
Going forward, I'll be using an average/rounded share price for the time being, at least until a decision is made later on down the road.
Investor Profile Snapshot
| INCOME | VALUE | GROWTH | QUALITY | THEMATIC |
|---|---|---|---|---|
| ★★★★★ 90% | ★★★★ 80% | ★★★ 65% | ★★★★★ 95% | ★★★★ 75% |
Note: This report provides analysis and commentary based on public information and is not intended as investment advice. Investors should conduct their own research and consult with financial advisors before making investment decisions.
Latest Update - 1H25 Key Takeaways
- Cash NPAT up 2% to $5,132m driven by 5% growth in net interest income with NIM improvement of 9bps to 2.08%
- Business Banking delivered strong performance with NPAT up 6% and business lending growth of 12%, well above system
- Digital leadership continues with 8.5 million customers banking digitally and enhanced money management tools
- Operating expenses increased 6% to $6,372m, outpacing income growth and pushing cost-to-income ratio up 120bps to 45.2%
- Credit quality showing early warning signs with home loan arrears up 12bps YoY to 0.66% and non-performing exposures up 14bps to 0.72%
- Strong capital position maintained with CET1 ratio of 12.2%, well above APRA's minimum requirement of 10.25%
What's Changed?
- Business Focus Intensifying: Strategic emphasis on business banking delivering results with 12% lending growth and 6% NPAT growth
- Digital Investment: Technology spend up 11% as bank continues to maintain leadership in digital banking capabilities
- Early Warning Signs: Credit quality metrics deteriorating with increased arrears despite overall low impairment expense
- Cost Challenges: Operating expenses growth of 6% outpacing revenue growth, creating efficiency headwinds
- Interim Dividend: Dividend increased 4.7% to 225 cents per share, with 73.2% payout ratio
Executive Summary
Commonwealth Bank of Australia delivered a solid performance for the half year ended December 2024, with cash NPAT increasing 2% to $5,132 million despite challenging economic conditions. The bank's Business Banking division emerged as the standout performer with NPAT growth of 6% to $2,002 million, driven by above-system business lending growth and improved deposit margins. Meanwhile, Retail Banking Services delivered more modest profit growth of 2% to $2,712 million, as margin pressure in home lending partially offset volume benefits.
CBA's digital leadership continues to differentiate it from competitors, with 8.5 million customers banking digitally and significant ongoing investment in technology and fraud prevention capabilities. The bank's NameCheck technology has prevented $410 million in mistaken payments, demonstrating tangible benefits from its innovation focus.
While overall performance remains solid, there are emerging challenges. Operating expenses increased 6% to $6,372 million, outpacing income growth and pushing the cost-to-income ratio up by 120bps to 45.2%. Additionally, early signs of credit quality deterioration are appearing, with home loan arrears increasing 12bps year-on-year to 0.66% and gross non-performing exposures up 14bps to 0.72%, reflecting rising cost-of-living pressures on some borrowers.
The bank's balance sheet remains robust with a CET1 ratio of 12.2%, well above regulatory requirements, positioning it to continue supporting customers through economic uncertainty while returning capital to shareholders through dividends and potential buybacks.
Financial Highlights
| Key Metric | 1H25 | 1H24 | Change |
|---|---|---|---|
| Cash NPAT ($m) | 5,132 | 5,019 | +2% |
| Net Interest Income ($m) | 11,934 | 11,404 | +5% |
| Net Interest Margin (%) | 2.08 | 1.99 | +9bps |
| Operating Expenses ($m) | 6,372 | 6,011 | +6% |
| Cost-to-Income Ratio (%) | 45.2 | 44.0 | +120bps |
| Loan Impairment Expense ($m) | 320 | 415 | -23% |
| Home Loan Arrears (%) | 0.66 | 0.54 | +12bps |
| CET1 Ratio (%) | 12.2 | 12.3 | -10bps |
| Dividend Per Share (cents) | 225 | 215 | +4.7% |
Segment Performance
| Segment | Cash NPAT ($m) | YoY Change | Key Developments |
|---|---|---|---|
| Retail Banking Services | 2,712 | +2% | Home loans up 6%, deposits up 8%, but margin pressure with NIM down 6bps to 2.49% |
| Business Banking | 2,002 | +6% | Business lending up 12% (above system), strong transaction banking, NIM down 5bps to 3.36% |
| Institutional Banking | 585 | -3% | Higher loan impairment expenses, lending volumes down 3%, higher deposit earnings |
| New Zealand | 631 | +1% | NIM improvement of 9bps to 2.30%, higher technology costs, loan impairment up 78% |
Key Outlook Points
| Category | Current/Near-Term | Medium-Term | Long-Term |
|---|---|---|---|
| Revenue Growth | 3.3% (FY25 forecast) | 3.9-4.1% (FY26-28) | 4.1% (FY29-30) |
| Net Interest Margin | 2.07-2.08% (FY25-26) | 2.08-2.09% (FY27-28) | 2.09% (FY29-30) |
| Cost Efficiency | 45.3% CTI (FY25) | 44.9-44.6% CTI (FY26-28) | 43.9% CTI (FY30) |
| Credit Quality | 8.0bps (FY25) | 9.8-10.8bps (FY26-28) | 10.5bps (FY30) |
| Earnings Growth | 1.7% (FY25) | 3-4% (FY26-28) | 4.5-5% (FY29-30) |
| Capital Position | 12.1% CET1 (FY25) | 11.9-11.8% CET1 (FY26-28) | 11.6% CET1 (FY30) |
Color Key:
- Positive for the company
- Neutral or moderate
- Challenging or negative
Valuation Summary
Our analysis derives a base case valuation of $167.50 per share, representing 1.5% upside to the current price of $165.00. This valuation is based on a blend of methodologies, with most weight assigned to DCF and P/E approaches that best capture the bank's strong market position and dividend generation capacity.
| Methodology | Implied Price Per Share |
|---|---|
| DCF - Base Case | $159.18 |
| DCF - Bull Case | $182.61 |
| DCF - Bear Case | $123.65 |
| 52-Week Trading Range | $136.15 - $168.68 |
| P/E Multiple - NTM | $153.58 |
| P/B Multiple | $152.50 |
| Dividend Discount Model | $113.05 |
| Implied Valuation Range | $155.00 - $175.00 |
| Current Share Price | $165.00 |
| Up/Downside to Base Case | +1.5% |
Our Bottom Line
Commonwealth Bank maintains its position as Australia's premium banking franchise, with industry-leading digital capabilities, strong business banking momentum, and a robust balance sheet providing resilience through economic challenges. The bank's solid 1H25 performance demonstrates the benefits of its diversified business model, with Business Banking strength offsetting more modest Retail Banking growth.
While the bank faces near-term challenges including cost pressures and early signs of credit quality deterioration, its technological advantage and superior scale efficiency position it well for sustainable long-term growth. The current valuation reflects this premium positioning, with the stock trading in line with our base case valuation.
We believe CBA offers an attractive combination of income stability and moderate growth potential, making it well-suited for investors seeking defensive quality exposure to the Australian financial sector. The 4.7% increase in interim dividend to 225 cents per share (implying a full-year dividend yield of approximately 2.8% at current prices) underscores management's confidence in the bank's capital generation capacity despite economic headwinds.
What to Watch
- Cost-to-Income Ratio Evolution: Progress toward improved efficiency as technology investments mature
- Credit Quality Indicators: Arrears trajectories in housing and business lending as economic pressures persist
- Business Banking Growth: Continuation of above-system lending growth and customer acquisition momentum
- Net Interest Margin: Sustainability in competitive environment and impact of future RBA rate decisions
- Capital Management: Potential for additional share buybacks beyond the current $1 billion program
Key Inflection Points
- Net Interest Margin Stabilization (FY26-27): After initial compression from competitive pressures and deposit repricing, NIM expected to stabilize around 2.07-2.09% from FY26 onwards
- Business Banking Growth Differential (FY25-30): Business Banking projected to outperform other segments with NPAT growth of 5.0-5.5% annually vs. 3.0-4.0% for Retail Banking
- Credit Quality Normalization (FY25-27): Loan impairment expense forecast to normalize from the current low of 7bps to 10-11bps by FY27
- Cost-to-Income Ratio Improvement (FY26-30): After stabilizing around 45% in the near term, gradual improvement to 43.9% by FY30 as technology investments yield operational benefits
- Digital Returns Realization (FY26-28): Sustained investment in digital capabilities should begin delivering more material efficiency and revenue benefits during FY26-28
Tailwinds
- Digital Leadership and Technology Investment: CBA has established a competitive advantage through its digital capabilities, with 8.5 million customers banking digitally
- Business Banking Growth Momentum: Business Banking segment has emerged as a key growth driver, with NPAT up 6% and lending growth of 12% above system
- Balance Sheet Strength and Capital Position: CET1 ratio of 12.2%, well above APRA's minimum requirement of 10.25%, providing buffer against uncertainties
- Scale Advantages in Australian Banking: As Australia's largest financial institution, CBA benefits from significant scale advantages in distribution, technology investment, and regulatory compliance
Headwinds
- Credit Quality Deterioration Signals: Early warning signs with home loan arrears up 12bps to 0.66% and non-performing exposures up 14bps to 0.72%
- Net Interest Margin Pressure: Competitive pressure in home lending and deposit markets as customers become more rate-sensitive
- Rising Cost Base: Operating expenses increased 6%, outpacing income growth (3%) and worsening cost-to-income ratio by 120bps to 45.2%
- Economic Headwinds: Persistent cost-of-living pressures affecting household finances despite low unemployment
Discussion