CBA profit and chart outlook

CBA heads into next Wednesday’s profit result with its chart interestingly positioned for short term traders.

Where CBA makes its money

This post is not intended to be an in depth analysis of CBA. However, one of the things I always begin with when looking at a company is to get a feel for how much its different business activities contribute to revenue and profit.

I thought I’d start this post by sharing this basic analysis for those who are not familiar with it

Last financial year, CBA’s operating income came from the following sources:

  • Net Interest Income - 68%
  • Fees – 13%
  • Wealth Management – 12%
  • Trading - 4%
  • Other Banking – 2%

Net interest income refers, of course, to the banks bread and butter business of lending money. It’s the difference between the interest it receives from customers and the interest it pays on borrowed funds. It’s the biggest part of the business and housing is in turn the largest part of CBA’s lending book.  Housing accounts for 51% of its assets.

What’s expected?

NAB’s quarterly update set the tone for the upcoming bank results. Growth is low and competition between the banks is intensifying.

In this low growth environment, markets are likely to be focussed on how each of the big banks is doing competitively. Is their market share changing and are they having to sacrifice interest margin to do this? Those with the best cost control and productivity will be best place to compete.

According to Bloomberg, the consensus expectation is for CBA’s half year cash earnings to be $4.84bn, up 5% on the same period last year. The dividend payment is expected to be unchanged at $1.98.

Net interest margin will be a key focus. Analysts are anticipating it may decline 2bp to 2.04%.Despite the fact that CBA has lifted mortgage rates; competitive pressure has prevented it fully passing on its own higher borrowing costs

CBA chart

After peaking at $85.66 on 9 January, CBA fell 5% over the next 2 weeks. Since then, it has been in a holding pattern which has now formed into a classic descending triangle.

A basic charting rule of thumb is that a break out of a triangle provides a decent guide to the direction of the next trend. However, this break needs to happen before we drift too close to the apex. A dribble through the corner of the triangle says nothing about direction

As things currently a stand a clear break through the top of triangle resistance implies an upward retracement of the decline from $85.66

However, what I’ll be watching for here is the opposite scenario. This could come in the form of a third failure at the triangle resistance. That would look like the classic “continuation triangle”. Three rejections of the triangle resistance could complete this weak correction leading to a break of the triangle support that could perhaps go on to test the next major support around $79.

The potential for a bearish continuation triangle here fits with a nervous market in a low growth environment for banks. Minor disappointments in the profit result could see the "Trump" rally being further unwound. 

For triangle pattern traders, another peak near the triangle resistance line here will provide an opportunity to sell with a close stop above the resistance.