By Gareth Vaughan
ASB's parent Commonwealth Bank of Australia (CBA) is now so big it's worth as much as Credit Suisse, Standard Chartered and Singapore's DBS combined, Sydney-based UBS analysts point out.
In a research note entitled One bank for the price of three issued after CBA's annual financial results in which the bank posted record annual profit of A$7.1 billion, UBS point's out CBA is now one of the most expensive banks in the world.
"CBA’s share price has risen sharply over the last quarter driven by its 'defensive' earnings and a global chase for yield," UBS' Jonathan Mott, Chris Williams, and Adam Lee wrote.
"However, at 3.0x NTA (net tangible assets) and 12.8x PE (price to earnings) it is one of the most expensive banks in the developed world. CBA’s market cap has now hit US$94 billion (a shade under A$90 billion or about NZ$116.5 billion), for which you could buy Standard Chartered, Credit Suisse and DBS."
With a market capitalisation of that magnitude, CBA is valued at almost twice as much as the entire market capitalisation of the New Zealand sharemarket, with the NZX's total value at NZ$59.5 billion. By another measure, Australasia's biggest bank is valued at about 57% of New Zealand's most recent annual nominal Gross Domestic Product of NZ$202 billion.
With a value hovering above US$90 billion, CBA has a bigger market capitalisation than the likes of Citigroup, Bank of America, Goldman Sachs or Deutsche Bank. However, despite their size and dominance of the banking industry in Australasia none of CBA, ANZ, BNZ's parent National Australia Bank nor Westpac, have made the international bank regulatory body's list of global systemically important financial institutions, or too big to fail banks. The Basel, Switzerland based Financial Stability Board has a list of 29 too big to fail banks. See the full list here.
'A function of the environment' for bank 'safer than British & US counterparts' due to higher home loan exposure
In a briefing following CBA's annual results, CEO Ian Narev, a New Zealander who played Davie in the 1979 television series Children of Fire Mountain, said: "We’re a $90 billion company. We’re in the top 10 banks in the world by market cap which is a function of the environment."
In its analysts' presentation CBA argued its assets are safer than comparable British and American banks because 52% of its balance sheet stems from home loans, which are "stable and long-term", versus 19% at British banks and 13% at US banks. On the other side of the ledger CBA said 59% of its combined liabilities and equity stem from deposits compared with 50% at British banks and 52% at US banks. And it said its balance sheet was less volatile due to a lower portion - 19% - of fair value assets, compared with 56% at the British banks and 59% at the US banks. The balance comprises assets at amortised cost.
Meanwhile, CBA also argued an "orderly adjustment" had occurred in the Australian housing market post the global financial crisis, with prices undergoing a "modest correction", and argues the characteristics typical of a housing market bubble aren't present in Australia.
'Valuation appears stretched'
For their part, the UBS analysts note CBA's forecast dividend yield of 9.1% given the bank's policy to pay out between 70% and 80% of profit in dividends. For the June 2012 year it's paying out A$3.34 per share, or 75% of profit. Nonetheless, UBS downgraded its rating on CBA shares to "neutral" from "buy" with a 12-month price target of A$55. It closed at A$57.05 yesterday.
"We continue to see CBA as a high quality bank delivering solid returns," Mott, Williams and Lee wrote. "It may continue to be supported if asset allocation and fund flows continue to be put towards stable higher yielding stocks. However, its fundament valuation multiples now appear stretched."
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21 Comments
Aussie govt's Four Pillar policy of fat and profitable banks is supposed to make them safer. If big US banks were too big to fail, what is CBA? Its share of the Aussie market (and ASB here) dwarfs any US bank's marketshare. It's gargantuan.
Who is the most economically powerful New Zealander? John Key or Ian Narev? Who has more influence on the direction of how much credit is generated and where it flows in the economy? If its Narev and he's not democratically elected and answers only to shareholders, many of whom are foreign, rather than citizens, isn't that a problem?
Big banks shape the way the economy develops by favouring certain collateral, especially property over others, and favouring big business and the wealthy over small business. In a functioning democracy an elected government rather than the financial sector should be the ringmaster. At the moment our politicians just shrug their shoulders and say there’s nothing they can do, it’s the market.
If you were a chartist you'd have to say the shares have broken the trendline and it looks like a double top with shoulder pattern forming.
CBA, and indeed the other Aussie Banks, are a grand investment.
All the returns of property investment, without the risk.
No realestate agent fees, no tennants to worry about, don't have to spend time combing through listings.... and all that rubbish.
As the article says ....
'CBA argued its assets are safer than comparable British and American banks because 52% of its balance sheet stems from home loans'
And they are deemed to big to fail, the support offered to the main Banks during the GFC proved that.
So fill your boots, you would be mad not to.
Yes , and if you sign up for the DRP ( Div. Reinvestment Programme ) , the generous 6 - 7 % pay outs will increase your stock holding by 50 % over just 5 or 6 years ....
...... this is a point lost on Marcus Padley ( a prominent stockbroker & commentator ) , who had a hissy fit on Sunday TV , that bank stocks had gone nowhere since the GFC .....
As Prof Jeremy Siegel ( USA ) has shown , dividends can make up the bulk of long term returns from shares , not price increases in the underlying stock ...
Siegel's thesis is that dividends are the overlooked factor in sharemarket returns ....
.. .. not only do private investors under-rate the powerful compounded effect of re-invested dividends , but most indices ( such as the Dow Jones , S&P 500 , etc ) make no allowance for the benefit of dividends , neither .....
This article reminds me of the economic experts states prior to the GFC, no problem, banks are safer than ever, maybe a slight slow down in housing prices etc etc. While at the same time, for those who were looking there was plenty of evidence of disaster ahead.
I am sure there will be a big economic down turn ahead, the current sacle of deficits is unsustainable for may countries, they will print to prop the whole show up. Australia and NZ cannot be ammune to that. Its starting to come to light that sub prime lending was and maybe still is alive in Australia. http://j.mp/L32BnJ
CBA posted annual revenue of $A 47 billion , which compares to NZ's GDP of $NZ 202 billion .
..... so CBA's " GDP " equates to 30 % of that of NZ's ...... impressive , but not nearly so as the grossly misrepresented value of 57 % ...
Come on guys , the market capitalization of the CBA has no relevance as a comparison to the GDP of NZ !
Struth mate...them's the same words spoken by a Maori bloke the day after the Treaty copy was swiftly flashed to the last drunken gathering of Maori to sign on the line.
Sold to the highest bidder...and every deal stuffed to the roof with 'middlemen' out for a cut of the action.
The pollies position themselves to sit right slam bang in the middle....now why is that!
Teach your little ones Mandarin and how to Kowtow without falling over.
the cba has made a lot of its shareholders a lot of money.
here in nz we now have the same opportunity on a lot smaller scale with the soon to be bank Heartland.
whats the bet it won't happen because kiwis will not support it just like other homegrown companies.
chances are that once registered as a bank overseas investors will jump in and kiwis can wave goodbye to all the profits .
The Australian Banks have been in NZ for over a century. Not certain, but the only NZ banks were BNZ and ASB and a few small regional savings banks. The big retail fellas have always been the AU banks. The growth and power of these banks was the take-over of the insurance companies NZI and Sth British, in the latter part of the 20th century, followed by the demise of the BNZ. More recently has been the entrance into the wealth management area with the takeover of MLC and NML.
The dominance of the AU banking sector has only been recent, coinciding with the silent amalgamation and restructuring of the finance industry.
..... it also helped the big banks , the " 4 pillars " , that Paul Keating enshrined their too-big-to-fail status in law .... the CBA , ANZ , NAB & Westpac each have an implicit government guarantee ...
They can gobble up smaller competitors at will , but no one can touch them .......
..... this is trade protectionism of the worst kind !
I think you a bang on here:
BNZ (floated then sold to NAB, Countrywide Bank (which was a collection of ex Building Societies that then bought United Bank,another ex building society, then the whole lot was sold to National Bank who was them selves sold to ANZ), TSB (did not join the Trustbank group in late 1980's, Trustbank was floated and then bought by Westpac) and Co-operative Bank (ex PSIS) and SBS Bank (ex building society).
Moral of the story appears to be:
if you float you will be subsequently sold
If you are a building society you have a greater chance of surviving
Boatman - housing is not a negative part of an otherwise good story - the CBA's exposure to residential housing is the WHOLE story. I recall reading that in the 70s housing formed around 25% of CBA's loan book. Its now > 60%. They are the worst of a very bad bunch in that regard.
Ralph Norris went out with a bang: "Former Commonwealth Bank chief executive Ralph Norris received a total package of $9.61 million in his final five months at the bank."
http://www.businessday.com.au/business/excba-chief-norriss-pay-topped-6…
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