Australian Investment Blog

Good Afternoon everyone

Market Data

What Mattered Today

Commonwealth Bank (CBA) reported full year results, RBA Governor Glenn Stevens gave his final public address before leaving office – while both provided good insight into the current economic landscape in Australia. Another reasonable session despite the index finishing in the red – more about the recovery from the session lows than anything with the market selling off between 10.30 & 11.30 before grinding higher into the close.

We had a range today of +/- 37 points, a high of 5550, a low of 5513 and a close of 5543, off -9 points or -0.16%

The main act today was CBA’s full year results, and the number was solid, while the outlook was reasonably cautious as expected. The stock had run fairly hard leading into the result, trading from the low 70’s up to $79 in early trade today before sellers took hold and pushed it lower into the close, down -1.29% to $77.40.

A solid result with some swings & roundabouts; Profit $9,450m (inline), bad debt charge $1,256 (low), margins stable (good), dividend $4.20 (inline), tier 1 capital of 10.6% (better)...

Commonwealth Bank (CBA) Daily Chart



The good

Tier 1 capital came in at 10.6% v 10.1% expected. This is a big beat and probably the key to the result. The market seems more focussed on capital than earnings if ANZ's update yesterday is a guide.

There remains a concern that banks are cum issue (raising additional capital to satisfy higher regulatory requirements), however, if they're not – and on these numbers it now seems unlikely, then we should see continued support for the sector.

Margins were broadly stable with Net Interest Margin coming in at 2.07% v 2.06% expected. Bad and Doubtful debts were very low in 4Q16 ($265mn vs. $427m in 3Q16) and they maintained their dividend – which is good

The not so good

Although the high-level numbers look fine, underlying trends appeared weak with most businesses seeing their profits decline over the half. Operating conditions remain tough; top line growth is hard to come by and managing costs, improving productivity remains key.

Still, the negativity priced into the stock/sector is high, and this result should allay some of the current fears. A solid report from a company that’s been under a decent amount of pressure.

Here we look at share price v earnings. Clearly, the market is priced for a drop in earnings as return on equity declines. That is a real trend and one that will likely play out in time however the Q becomes whether or not this is already priced into the stock. We think it probably is.



Source; Shaw and Partners



Looking more broadly, CEO Ian Narev was fairly downbeat about the broader economy expecting ‘solid underlying GDP growth and stable employment but nominal growth to remain weak’…

‘More of the same’ the most likely scenario, but with some downside risk…

As mentioned, RBA Governor Glenn Stevens gave his final public address today and talked somewhat more candidly than he has in the past. He did repeat his previous criticism that advanced economies had become overly reliant on ultra-low interest rates to boost growth reinforcing his "serious reservations about the extent of reliance on monetary policy around the world."

He wasn’t criticising what central bank did, but more highlighting their limited scope to actually support sustainable growth.....”it is that what they could do was not enough, and never could be enough, fully to restore demand after a period of recession associated with a very substantial debt build-up." He then went on to dispel the perception that a drop in borrowing costs will entice businesses to boost investment spending.

"Do businesses respond to interest rates being lowered in investment? "In my thinking about how monetary policy works, I've never thought that there's going to be that much effect from boards of directors saying, "Hey look, the cash rates went down 25 basis points, let's do that project."

It seemed he was pushing the same old line that central banks could only do so much around monetary policy while Governments had to step in with supportive fiscal measures, sighting the need for greater infrastructure investment. We agree with Glenn Stevens remarks today – super cheap money distorts asset prices but may not necessarily stimulate lasting economic growth, and as money gets more expensive through ‘eventual’ interest rate hikes the risk is that asset prices come back to earth with a thud!!

Sectors

Source; Bloomberg


ASX 200 Movers

Reporting this week

NPAT = net profit after tax (consensus numbers)
EPS = earnings per share (consensus numbers)
DPS = dividend per share (consensus numbers)



Select Economic Data – Today & Tomorrow; Stuff that really Matters in Green




What Matters Overseas

Trump seems to be imploding with the number and magnitude of outlandish statements ticking ever higher…..the more he talks, the better Clinton polls…




FUTURES down a touch across the board….

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000


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