Q1FY20 results are out for Commonwealth Bank of Australia [ASX:CBA].
Bearish sentiment towards the post royal commission Aussie banking sector has been the consensus for many analysts.
Recent reports of dividend cuts from other members of the Big Four aren’t helping matters.
CBA tried to cut through the noise with today’s update, announcing a 5% increase in unaudited cash net profit from continuing operations.
They also reported volume growth in all key divisions.
CEO Matt Comyn said:
‘The Bank remains well placed in a challenging operating environment.
‘In a low interest rate environment we will continue to maintain a disciplined approach that delivers balanced outcomes for all our stakeholders…who rely on our dividend.’
While no forecast was made, this acknowledgment of the importance of strong dividends has resonated with investors.
The CBA share price is up slightly by 0.34% at time of writing.
The quarterly update seems not to have set off alarm bells regarding the bank’s future profit potential, other than the interest rate battle.
But we beg to differ.
Reading between the lines
All may not be as good as it seems at first glance.
While cash net profit is up for the quarter, the year-on-year comparison does not look as promising.
Last year, CBA report an unaudited cash net profit of around $2.5 billion for the September 2018 quarter.
Today’s reported $2.26 billion is almost 10% lower than that figure.
Similarly, volume growth across divisions is somewhat offset by higher operating expenses. Higher staff costs and IT amortisation has driven expenses up 2% in the quarter.
Troublesome and impaired assets have also increased to $8.1 billion, reflecting ‘weakness in discretionary retail, construction and agriculture.’
CBA is also still in the process of remediating customers based on commission recommendations.
To date, only half of the $1.2 billion in customer refunds has been paid.
All the program provisions will cost $2.2 billion in total.
Add to this the lowered Net Interest Margin from the current interest rate margin, and you’ve got a list of negatives we can glean from this report.
And considering this interest environment ‘will continue to impact margins in future periods’, these negatives aren’t overnight fixes.
CBA currently have one of the lower dividend yields out of the Big Four, at 5.38%.
So while CBA may infer a strong dividend, the fundamentals suggest otherwise.
While investors may be optimistic, customers are not
Beyond the figures, CBA just doesn’t seem to be cutting it as a worthy Aussie bank.
Recent date from the Australian Financial Complaints Authority reveals CBA was the most complained about bank between November 2018 and June 2019.
Almost 4,000 complaints were lodged in that period against CBA, mainly regarding credit cards, personal loans, and mortgages.
Worse still, CBA’s previously owned insurance arm CommInsure are facing criminal charges for ‘hawking’.
Insurance products were sold through unsolicited phone calls that did not comply with hawking exceptions in the Corporations Act.
CBA are the only bank so far to be criminally charged following the Banking Royal Commission.
The fine could be up to $1.8 million.
The takeaway: there appears to be a lot standing in the way of CBA issuing a greatly improved dividend.
And that goes for the big banks in general. The current banking environment just doesn’t seem to favour the traditional banks as solid dividend payers.
Imogen van der Meer,
For Money Morning