Yesterday was definitely a shock. Banks, globally, didn’t stand a chance against institutions and even governments. Once the big boys have decided to sell, there isn’t too much that can stop you from spiralling down. Each of Australia’s big four banks dropped almost 4% or more.
Yet there may be some good news for Australia’s biggest lender, Commonwealth Bank of Australia [ASX:CBA].
CBA beats previous figures
Everyone predicted banking profits to be disappointing for 2016. However, CBA has been able to increase their half year NPAT by 4%. Amid global economic turmoil CBA was able to generate $4.8 billion. Operating income also shot up by 6% to $12.36 million.
Even in a declining market CBA has pulled through. They’ve maximised profits on household deposits (up 10.4%) and businesses lending (up 6.8%). Sure, low interest rates have helped somewhat in increasing people’s propensity to borrow. Yet it’s still impressive to be able to encourage home owners and businesses to spend in such harrowing times.
Investors will surely be happy to see of one of the big four perform so unexpectedly well. CEO, Ian Narev believes the growth can be attributed to customer satisfaction, stating,
‘Customer satisfaction has again led to volume growth across our business. Operating income grew 6 per cent during this period, with all businesses contributing. This consistency of income, combined with our focus on long-term productivity, sustains our commitment to keep investing in our customer-focused strategy.’
However customer focused businesses often leave out key stakeholders. CBA’s management has been put in charge to create shareholder value. And their latest figures are suggesting they may need to put more emphasis on this idea.
Not enough focus on CBA shareholders
Return on equity (ROE) is a key indicator of shareholder returns. It is calculated by net income divided by the number of outstand shares. And ROE is one area where CBA did not outperform, falling by 0.14%. This was largely due to the increase in the number of CBA shares after their $5.1 billion capital raising.
But you don’t need to calculate ROE to see that returns aren’t shaping up to shareholders’ expectations. CBA shares have dropped more than 13% this year, with yesterday’s performance helping the decline. But even if CBA is undervalued right now, the market keeps on selling.
Even though net profits have increased by 4%, this is half of what CBA was able to accomplish in H1 FY15. Of course a slowing economy will slow the growth of the banking sector. But how long will current conditions last?
CBA’s shares are only $2.72 off their low in September last year. I’m betting that traders and investors will be watching CBA’s shares very closely. If shares drop to the $70 per share level, you might start to see barging buyers coming into the market. I’m just speculating here, but there’s a possibility it could happen.
If we take a leaf out of Warren Buffett’s book, then a declining market shouldn’t matter. Market noise is nothing to Buffett. He’s only concerned with the future viability of the stock. Therefore if he identifies an undervalued stock, he will buy no matter what the market does. If the market dropped then Buffett’s views haven’t changed. Instead Buffett will buy more, as the stock is now cheaper. Even though it is difficult, you shouldn’t let a declining market scare you out of your position. Just like Buffett, you should stay calm and wait for the market to correct itself.
CBA’s intrinsic value is up to analyst’s discretion. However, if you believe you’ve bought in at a bargain, don’t be swayed by market noise.
Junior Analyst, Money Morning
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