Rising Fintech Rivalry Will Squeeze Margins Despite Digital Advances

Key Takeaways

• Mounting competition from fintechs and alternative finance options threatens CBA's customer base, pricing power, and legacy revenue streams.
  
• High operational costs and reliance on the property market heighten risks to earnings stability and limit future growth opportunities.
  
• Leading digital innovation, strong capital management, and dominant market position drive resilient profitability and earnings growth despite sector competition and broader economic challenges.

Catalysts

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

• The accelerated rise of fintech and non-bank competitors as well as new deposit products is leading to sharply increased competitive intensity in deposits and transaction accounts, which is already causing declines in CBA's main financial institution (MFI) share in key retail segments; this erosion directly threatens future revenue growth and deposit margins as customers become more price sensitive and more willing to switch providers.
  
• Persistent low or volatile interest rate environments, combined with growing deposit competition and the unwinding of favorable hedge tailwinds, are expected to exert significant downward pressure on CBA's net interest margins over the next several years, constraining both top-line revenue and overall earnings.
  
• Heavy reliance on the Australian residential mortgage market leaves CBA increasingly exposed to a single asset class; if the property market turns or credit conditions deteriorate, loan losses and impairment charges could rise substantially, directly weighing on net profit and return on equity while limiting future lending growth.
  
• Ongoing increases in technology, cyber, and regulatory compliance costs-including the need for continual defensive investments in fraud prevention and digital modernization-are driving operating expenses well above inflation, pressuring cost-to-income ratios and constraining improvements in net margins.
  
• The rising pace of technological disruption, including the threat of stablecoins, digital wallets, and rapid shifts in consumer preferences toward alternative finance, could disintermediate traditional banking services and erode CBA's legacy revenue streams, undermining both long-term earnings stability and the sustainability of current dividend policies.

Commonwealth Bank of Australia Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Commonwealth Bank of Australia compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Commonwealth Bank of Australia's revenue will grow by 3.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 36.8% today to 34.4% in 3 years time.
• The bearish analysts expect earnings to reach A$10.6 billion (and earnings per share of A$6.36) by about August 2028, up from A$10.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.7x on those 2028 earnings, down from 27.7x today. This future PE is greater than the current PE for the AU Banks industry at 15.2x.
• 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 7.69%, as per the Simply Wall St company report.

Commonwealth Bank of Australia Future Earnings Per Share Growth

Risks

• Population growth, urbanisation, and stable migration trends in Australia are expected to drive ongoing demand for mortgages and banking services, supporting CBA's lending growth and helping to underpin revenue and net interest income in the long term.
  
• Sustained investment in digital banking, leading AI capabilities, and the most widely used financial app in the country will continue to lower cost-to-serve, improve operational efficiency, and strengthen customer engagement, contributing positively to net margins and overall profitability.
  
• Strong capital buffers, prudent risk management, and a conservative balance sheet position CBA to weather market volatility and economic downturns, protecting earnings and enabling continued stable dividends through various cycles.
  
• Market leadership in both consumer and business banking, supported by a large customer base and growing transaction account share, ensures resilient fee income and competitive positioning, which secures robust operating income and net profit even amid sector competition.
  
• Ongoing ability to invest in innovation and productivity-evident in accelerated technology modernisation and successful cost-saving initiatives-provides scope for improved cost-to-income ratios and earnings growth, with technology and AI expected to deliver increasing financial benefits over coming years.

Valuation

• The assumed bearish price target for Commonwealth Bank of Australia is A$100.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Commonwealth Bank of Australia's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$146.0, and the most bearish reporting a price target of just A$100.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$30.8 billion, earnings will come to A$10.6 billion, and it would be trading on a PE ratio of 19.7x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$168.17, the bearish analyst price target of A$100.0 is 68.2% 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.