The Commonwealth Bank of Australia’s stellar result
The largest position in The Montgomery Fund portfolio, at almost eight per cent of the portfolio, is the Commonwealth Bank of Australia (ASX:CBA), purchased back when the price was below $78. This week, the company released its December-half profit results, revealing a business reinforcing and extending its competitive advantages in a fiercely competitive market.
Driven by record mortgage and business lending, as well as a benign bad-debt picture in the broader economy, the Commonwealth Bank of Australia reported a two per cent increase in cash profit to $5.13 billion, slightly ahead of consensus estimates of $5.03 billion. Given that so many Australian retirees rely on bank dividends for their next six months’ income, it will delight many that the dividend was increased by five per cent to $2.25 per share, which is in line with market expectations.
The bank’s net interest margin sat steady at 2.08 per cent.
More than a third of Australians nominate the Commonwealth Bank of Australia as their primary financial institution and almost nine million active app users log into the Commonwealth Bank of Australia over 12 million times a day giving the Commonwealth Bank of Australia insights and digital engagement that is unparalleled. This deep customer connection has enabled the Commonwealth Bank of Australia to link almost 100 per cent of its home loans to transaction accounts. Why is this important? Australian bank customers suffer, and banks benefit from extreme inertia. Switching accounts is so inconvenient that the cost far outweighs the perceived benefits. More than any other bank, the Commonwealth Bank of Australia seems to be leveraging that behaviour the best and in so doing, reinforcing its grip on the mortgage market.
These relationships are part of the company’s secret sauce – the proprietary sales channel through which it originates mortgages. The bank reports that mortgages originated through its own channels are 20 to 30 per cent more profitable than brokered loans, which incur commission costs. Elsewhere, Australia’s biggest banks increasingly lean on mortgage brokers – who now facilitate almost three-quarters of all home loans.
The Commonwealth Bank of Australia, unlike its competitors, has prioritised direct relationships, selling fully two-thirds of its mortgages directly. This strategic divergence is paying dividends, with the Commonwealth Bank of Australia now commanding a staggering 45 per cent share of all mortgages that aren’t brokered. Encouragingly, CEO Matt Comyn expects the Commonwealth Bank of Australia’s share to climb to 50 per cent in the near future.
Beyond home loans, the Commonwealth Bank of Australia is applying a similar strategy to business banking, expanding transaction accounts by 45 per cent over the past four years. With 1.3 million business transaction accounts – after eight per cent growth in just the past 12 months – the bank is now the dominant player in deposits (77 per cent of the bank’s funding) and business lending growth. While it still trails NAB in business lending, the Commonwealth Bank of Australia’s six per cent growth rate in the past year signals its ambitions. And keep in mind one of the most striking aspects of the Commonwealth Bank of Australia’s strength is its exceptionally low loan loss rate of just 0.07 per cent.
Meanwhile, a notable 11 per cent year-on-year increase in investment spending reflects the bank doubling down on frontline staffing, IT infrastructure, artificial intelligence, cybersecurity, and in-house technology development. While expenses grew six per cent to $6.4 billion, Matt Comyns’s track record should mean investments will yield significant long-term benefits, further cementing its lead over rivals.
The bank’s balance sheet remains robust with a Common Tier 1 (CET1) capital ratio well above the regulatory minimum of 10.25 per cent, at 12.2 per cent. The bank is holding $2.4 billion of additional provisioning for bad and doubtful debts above that which it says it needs to cover its mid-case economic scenario.
With over seven million credit card accounts, the Commonwealth Bank of Australia has access to real-time consumer data, providing it with an essential edge in timing investments and capital expenditure. That data also provides insights into the economy, with the Commonwealth Bank of Australia noting the retail and hospitality sectors were two of the biggest beneficiaries of stage-three tax cuts and falling inflation, which supported bigger savings buffers. The Commonwealth Bank of Australia stated that the amount of money being put into their offset accounts had almost doubled over the six months to 31 December.
The Montgomery Fund owns shares in Commonwealth Bank of Australia. This article was prepared 13 February 2025 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Commonwealth Bank of Australia, you should seek financial advice.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
