By Gareth Vaughan
His bank's market capitalisation has surged above A$100 billion making it the tenth biggest bank in the world. But it has got more than 90% of its assets in Australia and around two-thirds of its loans are to the Australian residential property market.
So is the Commonwealth Bank of Australia (CBA), parent of New Zealand's ASB and insurer Sovereign, over valued?
Interest.co.nz put this question to CBA managing director and CEO Ian Narev, who responded by saying there's not really any right value.
"So the fact that we're trading at a certain multiple to book (value) depending on how you measure it of 2.3 to 2.5, and others are trading at less, doesn't by definition mean it's overvalued," Narev said.
"What I can say is two things. A) We manage our valuation to the long-term, genuinely. And to that end we don't fixate on what the share price is today, (or) where we are in the world league ladder, and it doesn't change our strategy at all."
"There are clearly forces in the equity markets at the moment that suit the profile of our stock, which is globally there is a low interest rate environment, you've got investors searching for yield. They're searching for yield with equity stocks with defensive characters," Narev said.
"CBA and the other major banks in Australia are attractive. That is creating a dynamic underpinning the performance of the stock at the moment. Do we expect that dynamic to continue for ever? Of course not. Can I say when it's going to end, what's going to happen after it? I don't know and you can't manage the bank to that."
"We've got a strategy. We go to talk to investors about it, we've focused very much on it. It's a long-term one and we're not going to get diverted from it because we get this sense that 'gosh we're suddenly big, shouldn't we go for bigger and bolder?' I think that would be a very problematic way to run the institution."
Narev's comments come after analysts at UBS downgraded their rating on CBA shares to "sell" from "neutral" in January, citing its market value topping A$100 billion and "stretched" valuation metrics. This comes after The Wall Street Journal reported in December that CBA, the biggest of Australasia's big four banks, had reached a market value bigger than all of Germany's banks combined. And prior to that the UBS analysts had pointed out CBA's market capitalisation had grown to the extent that it was worth as much as Credit Suisse, Standard Chartered and Singapore's DBS combined.
With its interim results, which saw a 6% rise in cash profit to A$3.78 billion, CBA increased its dividend per share by 20% to A$1.64 with 70% of cash earnings paid out compared with 61% in the same period of the previous year. CBA has about 52,000 staff and some 14.5 million customers. It has total assets of A$721 billion and a market leading 25.1% share of the Australian residential mortgage market. It's A$365.674 billion home loan book represents 67% of CBA's total lending interest earning assets.
A 'very high acquisition bar' set
With this surge in value has come speculation about CBA making a major Asian acquisition, with recent talk in the Australian media of a swoop on Standard Chartered. But it doesn't sound like it'd be worth holding your breath waiting for this to happen.
"I've got a very simple philosophy on M&A (mergers and acquisitions), which is about diversification. Which is if you were to do a deal you must be creating more value for your shareholders than they can create for themselves. Because our shareholders can decide to buy a share in Standard Chartered so we've got to show them why one plus one would equal more than two even if a deal were possible," Narev said.
"That is a very high bar and we can't find things that meet that bar. And if we can't we won't do it because we'll just say to the shareholders they can do diversification by themselves - they can make that transparent trade off."
Nonetheless he said over time he'd prefer a slightly more diversified asset base in both asset class and geography.
"Because it creates better ability both to access different growth pockets and for things to offset each other a little bit. But we're very comfortable with the approach we're taking about, which is to do a bit more in business banking, do a bit more in institutional banking in Australia and New Zealand, keep doing what we're doing in Indonesia, keep growing the global assert management business and actually in those different pockets we're getting a decent degree of diversification. And if that's all we end up being able to do because that's the right thing to do, then I'm okay with that," Narev (pictured) said.
In Indonesia CBA owns just under 98% of PTBC.
'Manageable' losses even if Aussie unemployment hits 13% and property values plunge 40%
Meanwhile, the analysts' presentation that came with CBA's half-year financial results featured a section arguing factors that typically characterise a house price bubble aren't evident in Australia. Nonetheless CBA went as far as saying it foresaw "modest and manageable" losses through its residential mortgage exposure even under "aggressive stress." Asked how CBA's leadership could be so sure of a manageable outcome in the case of say, a hard landing in China, Narev said you never say never.
"(But) we stress the mortgage book to 13% unemployment (it's currently 5.4%) and a 40% drop in property values. We are very comfortable still with the level of losses that does. Now all models have got potential flaws. You never know what you don't know. But against any foreseeable scenarios, driven by a hard landing in China, freezing up of credit markets, all those sorts of things, we are comfortable that we can withstand the shock," said Narev.
"The regulators are (also) asking us to do stress tests and the stress tests they're asking us to do also show the bank is very resilient. So we're very careful. But we're very comfortable with the quality of the book, the quality of our lending and the quality of our balance sheet."
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