For almost two decades Commonwealth Bank scrip has been the standout selection for retail and institutional investors in the listed banking sector, but the recession and declining interest rates now appear to be eroding its performance relative to peers.
While CBA retained an edge on most returns measures in 2020, many investment analysts believe the gap will narrow over the next three years as the group’s margins deteriorate.
In certain respects the latest half year results released on Wednesday offer evidence that the bank is relying on the proceeds of asset sales to cloak a sharp slide in the operating performance of its core businesses.
Without hefty capital gains from offloaded businesses, CBA’s profitability would have taken a materially bigger hit in the December 2020 half.
CBA’s current strategic trajectory is reminiscent of NAB’s fall from grace at the turn of the century when it began to offload profitable businesses to soften the impact on investors of ill-conceived acquisitions and delinquent corporate practices.
A flurry of analyst downgrades in recent weeks is a signal that comparative investment sentiment is starting to turn against CBA and in favour of Victorian-based majors – NAB and ANZ.
Evans and Partners analyst Matthew Wilson is among the growing list of industry number crunchers taking a negative view on CBA.
Wilson believes NAB and ANZ will produce dividend yields in line with CBA by the end of the current financial year and move ahead in 2022.
He is forecasting a similar trend in terms of earnings per share, although NAB and ANZ are not expected to topple CBA on that metric until 2023.
Wilson’s main concern is that CBA’s share price premium has expanded at a time when its return on equity has converged with two of its main competitors.
Right now, the premium market valuation enjoyed by CBA is mostly unrelated to its operational performance.
Rather it is being driven by asset sales that are helping to fund CBA’s sector-leading dividend yield of 3.5 per cent and stoking expectations of a massive share buyback.
Goldman Sachs analyst Andrew Lyons, who has a sell recommendation on the bank’s scrip, believes the market will eventually see through the yield story and focus on the negative impact of declining rates on CBA’s earnings profile.
A raft of recent asset sales in Australia and overseas means that CBA is sitting on more than $9 billion of surplus capital that could stretch to $10 billion by the end of June when the bank is likely to pocket the proceeds of several spinoffs pending regulatory approval.
In the last six months CBA’s senior management has been hinting at the prospect of a big capital return that the market expects will result in at least $5 billion of scrip bought back from investors.
UBS chief banking analyst Jonathan Mott is tipping the bank will announce the repurchase at its full year results in August and that it could be for as much as $8 billion.
As NAB proved 20 years ago, flogging a bundle of assets to fund record buybacks can only enhance performance measures for a