Commonwealth Bank of Australia (CBA) Update

Submitted by Craig Strzelecki on 27 February, 2007 - 06:23

Commonwealth Bank of Australia (CBA) have an upgraded Buy 1 share trading recommendation and a price target of $57.50 from analyst UBS. The share analyst has commented that the bank is seeing a long term turnaround, which is well underway. CBA's 1H07 result delivered 13% EPS growth, $100m above expectations. Strengths that the analyst can see in the bank are: 1) strong, under-leveraged franchise, 2) significant changes in executive ranks, 3) good upside in both revenues and costs, and 4) potential register squeeze. Risks that the analyst have observed about CBA: 1) retail bank division promises a lot, and 2) delivery is key. Improving customer service remains the CEO's top priority. Eighteen months in, the data is beginning to turn more positive, with complaints and injury levels down, and satisfaction beginning to rise. This is critical in stemming CBA's ongoing customer run-off, the key driver of CBA's market share slippage. Cash NPAT of $2,271m was up 14% sequentially. Key drivers: 1) AIEA growth of 8%, 2) margins down 3bp (-7bp CBA format), 3) cost control in the bank division, and 4) lower BDD supported by flat NPLs. Result quality impacted by 1) lower tax rate - CBA target 28.5%, 2) one-off gains (more to come in 2H07), and 3) retail division revenue growth was only 4%. Drivers for the CBA stock price: 1) stock is cheap post upgrades at 13.5x FY08E (diluted), 2) the register beckons, 3) lead indicators are improving, 4) corporate bank is accelerating, and 5) Wealth Management (WM) is delivering. Risks for the CBA share price: 1) retail division still offers risk, and 2) WM gains are part cyclical. Their price target is based on DCF, international peers and sum-of-the-parts

Commonwealth Bank of Australia Limited is listed on the Australian Stock Exchange (ASX) under stock code CBA. You can view their investor website here. Ralph J Norris is the CEO of CommBank and John Schubert the Chairman. The company offers banking, financial and related services. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade CBA. Check your charts and good luck with your share trading!

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