Commonwealth Bank (ASX: CBA) recently took the honour of becoming the ASX 200’s biggest firm by market value.

At almost 10% of the index as of July 31, millions of Australians own the shares – either directly, through index tracking ETFs or through their super fund’s Australian equity holdings.

CBA report their full year earnings on Wednesday August 14th. This will give investors a chance to check the company’s progress, see how their investment thesis is playing out and learn what dividend payment they will receive.

What do markets want to see from CBA’s full year earnings?

Here are the three big three things that Morningstar’s banking analyst Nathan Zaia thinks investors will be looking out for:

Interest margin trends: Late 2023 and early 2024 brought intense competition in the banking industry as lenders battled to win mortgage business and keep customers. This competition led to lower interest margins (the difference between the bank’s cost of funds and the interest they can charge on loans). Markets would ideally like to see signs that competition has eased and that banks have been able to earn higher, or at least stable, net interest margins.

Signs of loan stress: Markets will be interested to see how higher interest rates and a squeezed Australian consumer are reflected by default rates and other signs of stress in CBA’s loan book. In May 2024, Aussie banks reported a rise in arrears due to higher mortgage repayments. This didn’t impact profits as the banks already held large loan loss provisions and struggling borrowers struggling were able to sell into a strong housing market. Current arrears are near long-term averages but could trend higher as savings run down and higher rates hit those whose low-rate fixed loans matured only recently.

Operating expenses outlook: There are two simple ways for a business to grow its profits: they can try to increase revenues or they can try to cut costs. Cost savings are a key part of CBA’s strategy, and investors will want to see that any efficiency gains are outweighing inflationary pressures on CBA’s cost base.

CBA dividend forecast

Zaia’s full-year dividend forecast for Commonwealth Bank during fiscal 2024 was 460 cents per share. CBA paid a dividend of 215 cents per share following its H1 results, which suggests that Zaia expects a further dividend of around 245c per share this time.

It’s also worth noting that CBA has far more surplus capital than is required by the Basel international banking framework. Its capital position also remains stronger than the target range set by management. This surplus cash could support a bigger dividend or further share buybacks at some point in the future.

Go here to read more about regulatory capital and how it could impact dividends and share buybacks from Australia's big banks.

The longer-term view

Zaia expects Australia to see low-single-digit credit growth over the medium term, given modest economic growth. He also expects refinancing activity to continue to slow now that most older loans having largely matured and have been repriced at higher rates.

This market dynamic, where banks compete for a modest pool of new loans and fight to retain existing customers, fuels competition on rates. In the medium term, however, Zaia expects bank margins to improve modestly regardless of what the Reserve Bank of Australia does with interest rates.

If rates stay higher for longer, banks can continue to earn a larger margin on low-cost customer deposits and income from hedges. If rates fall, banks can offset headwinds by repricing loans and deposits to protect margins. In other words, they can reduce deposit rates by more than home loan rates.

Zaia expects Commonwealth Bank to make modest market share gains over the medium term and assumes that its total lending growth averages 4% over the next five years.

Where is CBA’s valuation sitting before earnings?

Zaia thinks Commonwealth Bank (ASX: CBA) shares look expensive at over 20 times forward earnings estimates and almost 3 times book value. Zaia believes these levels leave little room for disappointment. They are also at odds with his estimate for just 4% annual earnings growth.

Zaia’s Fair Value estimate for Commonwealth Bank is $90 per share. Shares currently command a price of $130 per share and have a one-star Morningstar rating.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. Read this article by Mark LaMonica for a guide to finding moats.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.