CBA gold medal fundamentals outweigh the headlines
Investors should focus on the bank’s robust intrinsic value rather than claims of adviser misconduct, says Morningstar senior equity analyst David Ellis.
Investors should focus on the bank’s robust intrinsic value rather than claims of adviser misconduct, says Morningstar senior equity analyst David Ellis.
The banking royal commission today turned its focus to Australia’s largest lender, Commonwealth Bank of Australia (ASX:CBA), and heard from one executive who conceded the bank was a “gold medallist” when it comes to charging customers without providing a service in return.
But while the headline-grabbing tales of misconduct may titillate the daily news cycle investors must remain focus on the intrinsic value of Australian banks such as CBA, says Morningstar Australia analyst David Ellis.
Australian lenders benefit from wide economic moats and big competitive advantages, Ellis says.
Commonwealth Bank and Westpac Bank (ASX: WBC) are the most undervalued of Australia's financial institutions, trading 18 per cent and 15 per cent below fair value estimate (FVE), respectively.
National Australia Bank (ASX: NAB) is trading 10 per cent below Morningstar's FVE, and Australia and New Zealand Banking Group (ASX: ANZ) is 9 per cent below.
Ellis has reiterated his positive assessment of Australia’s banks, despite this week’s news of high rates of misconduct within its wealth operations.
"The four major banks benefit from strong competitive advantages and wide economic moats [and a common] solid outlook for balance sheet growth, bad debts, earnings and dividends," Ellis says.
While he concedes the royal commission is key risk factor, “casting a long shadow over the major banks", he believes the opportunities outweigh the risks.
Risks and opportunities less clear-cut
The following lists suggest risks outnumber opportunities. But Ellis insists a housing collapse or recession are unlikely. Banks' mortgage businesses are strong enough to weather a national house price fall of 20 per cent or more, he says.
"We expect an orderly correction during the next few years as incomes need to increase relative to house prices, but see no signs of a collapse in house prices.”
China may be among the "risks" list below, but is also an opportunity because of its economic leadership position in Asia.
Risks
- Regulatory
- Recession
- Housing collapse
- China
- Digital disruption
Opportunities
- Technology leverage
- Economic recovery
- Retirement savings
- Asia.
Ellis reminds investors that Australia benefits from a "high quality and stable banking system, supervised by APRA [Australian Prudential Regulation Authority] with financial stability well managed by the Reserve Bank of Australia.
"Australian major banks are robust and resilient, balance sheets are strong," he says, with strong funding profiles and "robust ability to withstand disruption".
That said, Ellis acknowledges the seriousness of the allegations that continue to emerge at the royal commission: "But bank culture needs to improve,” he says.
Earlier today Linda Elkins, executive general manager of CBA division Colonial First State, faced the commission amid revelations the bank paid $118 million in refunds to customers.
“You’d be the gold medallist if ASIC was handing out medals for fee for no service,” counsel assisting the commission Mark Costello said.
“Yes,” Ms Elkins replied.
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Glenn Freeman is a Morningstar senior editor, based in Sydney.
Lex Hall is Morningstar's content editor.
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