Implementing NameCheck Technology Will Raise Expenses Now But May Strengthen Customer Trust In The Future

Key Takeaways

• Rising technology investments may increase operational costs, affecting short-term net margins and earnings without immediate revenue benefits.
  
• Competitive mortgage and deposit markets and retail deposit reliance could pressure interest margins, affecting future revenue and net interest income.
  
• Commonwealth Bank's tech advancements, strong lending growth, high customer satisfaction, and focus on balance sheet and security strengthen operational efficiency and future profitability.

Catalysts

Provides retail and commercial banking services in Australia, New Zealand, and internationally.

• Rising investment in technology and AI infrastructure, while beneficial in the long run, could lead to higher operational costs without immediate revenue impact, potentially affecting net margins and earnings in the short term.
  
• Intensive competition in the mortgage and deposit sectors may pressure interest margins and lead to reduced profit growth, impacting both net interest income and net margins.
  
• Expansion in business lending, especially in sectors like construction and hospitality, could increase risk exposure, potentially impacting future loan impairment expenses and credit quality, which could affect earnings.
  
• A significant amount of the bank’s recent income growth has been driven by retail deposits, which could be sensitive to rising interest rates or competitive pressures, impacting future revenue streams and net interest income.
  
• Continued investment in digital and loyalty programs, like CommBank Yello, while intended to boost customer engagement, may not translate into immediate financial return, thereby impacting short-term revenue growth and net earnings.

Commonwealth Bank of Australia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Commonwealth Bank of Australia's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.6% today to 34.7% in 3 years time.
• Analysts expect earnings to reach A$10.8 billion (and earnings per share of A$6.51) by about February 2028, up from A$9.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, down from 28.3x today. This future PE is greater than the current PE for the AU Banks industry at 14.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Commonwealth Bank of Australia Future Earnings Per Share Growth

Risks

• The Commonwealth Bank of Australia's significant investments in technology and AI-driven customer experiences, including the launch of the Gen AI-powered messaging service and enhancements to the CommBank app, could positively impact operational efficiencies and future revenue growth.
  
• The ongoing strong growth in business lending, up by 12%, along with a high share of proprietary home lending in Australia (over 45%), suggests that the Commonwealth Bank is effectively expanding its core lending business, which could support future earnings.
  
• Despite economic uncertainties, high levels of customer satisfaction, as reflected by the consistent #1 Net Promoter Score position for 26 consecutive months, indicate robust customer loyalty and could translate into steady or increased revenue streams.
  
• The bank's focus on strong balance sheet management, with a capital ratio of 12.2% well above regulatory requirements, provides resilience and capacity to support further growth, potentially benefiting profitability and shareholder returns.
  
• Investments in digital and security initiatives, such as reducing scam losses by over 70% and introducing NameCheck technology, reinforce the bank's competitive edge and could support both revenue stability and customer trust, potentially safeguarding future net margins.

Valuation

• The analysts have a consensus price target of A$107.288 for Commonwealth Bank of Australia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$142.0, and the most bearish reporting a price target of just A$80.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$31.2 billion, earnings will come to A$10.8 billion, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$165.44, the analyst price target of A$107.29 is 54.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.