Baby boomers have been the major beneficiaries of rising housing prices over the decades. That does not necessarily mean it’s a good investment decision for them to buy residential property as they near or begin retirement.
A tight labour market and sticky inflation suggests that the Reserve Bank is not about to cut the cash rate. Indeed, it’s more likely the bank will lift it again – good news for those with cash and term deposits.
Behind Commonwealth Bank’s run to $100
May was an amazing month for the Commonwealth Bank of Australia (ASX: CBA) share price, which surged 12% over the month, managing to breach $100 for the first time.
What’s happening to the CBA share price?
CBA has been a strong performer since the worst of the COVID-19 crash. The bank’s loan book has held up well, although it’s still provisioned strongly for the potential fallout.
At 31 March 2021, the bank still had $6.5 billion of total credit provisions. CBA explained that Australia and New Zealand’s economic recovery from the COVID-19 pandemic continued during the March quarter. Improvements in the economic outlook, sound portfolio credit quality and a continued reduction in consumer finance balances resulted in a moderate reduction in total credit provisions, from $6.8 billion. There was a positive outcome for the loan impairment expense for the quarter (a benefit of $136 million, or 0.07% of average gross loans and acceptances).
CBA said that provisioning coverage remains strong, with the bank continuing to adopt a cautious approach to managing risks across its lending portfolios as the recovery continues, particularly as customers transition from temporary COVID-19 support measures.
Only 1% of deferred loans were impaired or restructured, with another 4% requiring ongoing assistance. The bank expects a modest increase in its home loan portfolio arrears over the next few months. But this is a strong outcome compared to how things looked 12 months ago.
Big profit generation
The big bank is still making a lot of money for investors. In the third quarter of FY21, it made $2.4 billion of statutory net profit.
Third-quarter cash net profit from continuing operations was $2.4 billion in the quarter, up 24% from the first half quarterly average, mainly driven by the lower loan impairment expenses I’ve already referenced.
It’s this impressive profit that is improving the balance sheet and improving the outlook for shareholder payouts like dividends. The CET1 capital ratio has increased to 12.7%. CBA looks like a fortress right now.
Summary thoughts on CBA and the share price
I wasn’t expecting CBA to get to $100. But here we are. The economic picture is looking much better and profit is returning. The search for yield is strong with interest rates still so low.
Banks are definitely known for being big dividend payers. Compared to local and global peers, CBA is expensive; but it’s doing the right things when it comes to stability and offering customers the best service.
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