Which Bank is Now Valued at US 111 Billion

The Commonwealth Bank of Australia (CBA) reported a very good set of numbers, we highlighted it yesterday as one of the most important companies to report in the Asian region and its impact would be key to the ASX200 and All Ordinaries indices. Yesterday’s note outlined the importance of not only a solid earnings number for CBA but a commitment to strong dividends.

When asked by a Hong Kong based journalist for an instant reaction, we summarised our view on CBA’s result early in the day by saying the following:

Not only is the A$3.78bn interim earnings result a strong earnings number, but was also backed by a 160 cent per share dividend which surprised many on the upside. The market was looking for a number closer to 145 cents per share. In the overall context of low cash rates, this matters. CBA’s result shows the underlying Australian economy is still very strong and improving. The banking space was well supported by the RBA’s decision to slice the cash rate, all business divisions are improving for CBA and most importantly the level of bad loans is falling.

This will:
1) See many of the offshore bears hoping for an Australian banking collapse re-evaluate their positions and move elsewhere, knowing that the tide is too hard to fight; and
2) Encourage more funds which have been parked on the sideline to come back into the market.

In essence, CBA’s profit is no fluke result. Its not impacted by a one-off set of circumstances nor is it distorted by lower bad debt charges or fancy accounting. Its a rock solid, good quality number which the market loved, sending shares 2.4% higher to new all time highs. Return on equity for CBA is at a very respectable 18.1% – not even Goldman Sachs with its solid fourth quarter result can match this annualised rate of return, despite being globally diversified and in much riskier businesses. Goldman booked returns on equity at 16.5% last month.