Why CBA (ASX: CBA) is the Best Bank Share to Buy

 This article was originally published at: MF & Co. Asset Management.

CBA shares (ASX CBA) have recently gotten into hot water over the royal banking commission. Despite this, CBA is still the best bank shares to buy and the royal commission into the Financial Planning arm won’t affect them as much as people think. The recent price pressure is an opportunity to buy the stock.

Commonwealth Bank continues to be a leader amongst its peers in a number of qualitative and quantitative factors.

About Commonwealth Bank of Australia (ASX: CBA)

CBA is Australia’s leading financial services organization, providing retail, business and institutional banking services to over 10 million customers.  With the support of innovative technology, Commonwealth Bank stock strengthened its position in home lending and retail deposits.

Commonwealth Bank stock also has the largest physical distributional network in Australia which consists of 1,150 branches, 3,800 Australia Post agencies, 3,300 ATMs and 155,000 merchant relationships.

Financial Planning Troubles Only A Small Piece Of The CBA Pie

The recent troubles with the banking royal commission into Financial Planning has thrust CBA and other banks into the spotlight. This has caused quite a bit of downward pressure on CBA stock. However, we see this as a buying opportunity. CBA, along with the other major Australian banks ANZ, WBC and NAB have all started to or will commence divestment of their Financial Planning arms.

In addition, according to CBA’s 2018 half-year results, CBA’s Financial Planning arm Colonial First State (CFS) makes up just $500 million of the $21.26 billion in revenue from ordinary activities. At just 2.3% of CBA’s massive revenue line, the issues with Financial Planning are not material.

The recent share price route due to issues at Colonial First State is over done and presents a buying opportunity for astute investors.

CBA Building On Its Technological Advantage

Commonwealth Bank stock continues to improve customer satisfaction by investing in Technology such as Netbank. Commbank spent up to AU$1.2 billion on IT services in the first half of FY17 where AU$222 million was spent on technology application, maintenance, and innovation.

CBA became the first to provide the temporary lock and unlock on credit card service, which gave customers more confidence on credit card security. Furthermore, with the innovation of instant transaction alerts for credit cards as well as camera pay, customers are able to receive money by using their smartphone camera to scan a code.

CBA shares Continue To Deliver Solid Growth

ASX CBA shares delivered a solid financial performance for the past 5 years. The bank performed better than the previous year, with an 8% increase in net profit after tax ($9,928 million). Moreover, the company’s earnings per share experienced stable growth and delivered a 7% increase to 559.1 cents on the previous year.

Although CBA shares cash return on equity (ROE) is 16%, which was 0.5% lower compared to last year (16.5%), CBA indicated that this was due to the 5.1 billion capital raising and still has the strongest ROE amongst its peers.

Commonwealth Bank of Australia (CBA: ASX) EPS

Commonwealth Bank of Australia (CBA: ASX) NPAT

Commonwealth Bank Shares Outperform Its Peers In Financials

ASX CBA shares main domestic peers are Australia and New Zealand Banking Group Ltd. (ASX ANZ), National Australia Bank Ltd. (ASX NAB), and Westpac Banking Corp. (ASX WBC) — all rated ‘AA/A-1+’ with stable outlooks.

CBA stock EPS growth at 3.5% beat the other major domestic banks in 2017. Even though CBA’s P/E at 14.74 is slightly higher than WBC’s (13.79), Commonwealth Bank’s higher quality earnings due to better technology allow it to trade at a higher premium to the other banks.

CBA shares ROE at 15.65% is higher than its peers, indicating the firm can generate higher profit with the shareholders invested capital. As for the net interest margin, Commbank earns (2.11%) the most among its peers, showing a better profit generation ability in terms of retail banking.

Commonwealth Bank of Australia’s ability to meet its debt obligations from operating earnings is the strongest amongst the big four, with the interest coverage ratio of 212%, the highest amongst its peers. Compared with CBA shares, the other three banks’ lower interest coverage ratios indicate their businesses are more vulnerable to interest payments and to increases in interest rates.

ASX CBA Mitigates Risk Through Heavy Investments In Technology And Personnel

Commonwealth Bank of Australia developed management schemes to mitigate various sources of risks in terms of technology, fluctuations in the domestic housing market and regulatory environment.

Technology related risks are caused by the innovation in the technology that is used in CBA’s daily business such as cyber-security. The firm mitigates these risks through heavy investment in innovations and alignment with technology partners.

In terms of fluctuation in the domestic housing market, Commbank enhanced the credit quality and control, conducting stress tests and expanding the business line to diversify the risk of its home loan portfolio to mitigate these risks.

Commonwealth Bank stock mitigate compliance risks through investing heavily in regulatory compliance initiatives. The company also upgraded their anti-money laundry scheme operations after been pulled up by AUSTRAC.

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Challenges Ahead But Still The Strongest Of Its Peers

CBA stock investors may be affected by the uncertainty of potential penalties caused by the civil case as well as penalties and regulations coming from the banking commission. Any negative news from this case and from the royal commission could hurt ASX CBA’s share price.

However, based on the fact that Commonwealth bank has beaten its peers in terms of its profitability such as higher ROE and EPS growth in last financial year, Commbank looks to be in a stronger position than the other major banks.

If you don’t want to own the shares directly, you can sell Put Options to gain exposure to CBA upside.

Disclosure: MF & Co. Asset Management and the author own CBA stock.

This article on Commonwealth Bank is written by Henry Fung, Managing Director at MF & Co. Asset Management, a boutique investment firm based in Sydney, Australia. For MF & Co.’s full website and further articles follow the link: MF & Co.

Categories: Australian Stocks, Featured, New Zealand Stocks

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