Commonwealth Bank (CBA) Update

Submitted by Jim Thesiger on 29 May, 2008 - 14:18

Commonwealth Bank (CBA) has a neutral stock recommendation and a share price target of $47.50 from Australian stockmarket analysts from Citi.

Commonwealth Bank (CBA) Wealth Management levers

Wealth Management update shows CBA relatively well placed:

CBA’s WM update highlighted levers available to help weather market volatility (1) distribution – c10 million bank customers & global reach, (2) diversification – UK/Europe a key focus given higher margins, solid o/perf across most asset classes (3) scale (cost-to-income 54% down 700bp over CY07), (4) b/sheet – CBA will continue to provide its b/sheet to seed investments for clients. AWG $1.3bn sell-down 2/3 complete (return above cost of capital), remainder in negotiation.

March quarter performance appears encouraging:

Key highlights post 1H08: (1) 3Q to March FUA -5%, net inflows still positive +1%, (2) CBA expect Avanteos net flows to be sector leading, 23% above First Choice over 3Q, (3) gradual improvement in cross- ell of insurance to bank customers (eg. 35% from 25% for loan protection) in March-07. Management highlighted organic g as preferred to M&A, with the exception of small bolt-ons.

Cost a focus in a volatile market:

Cost flexibility was a focus post Perpetual y’day and recent Fund Mgr downgrades. CBA appear better placed given (1) scale, (2) tailwinds from IT integration, offset by (1) lag in re-basing costs when mkts fall, (2) desire to invest through the cycle.

CBA remain Neutral given 106% rel to Peers.

We remain Neutral on CBA given it is trading at a PE of 11.4x FY09E, 6% premium to Peers. Positives: (1) strong capital position rel to Peers (2) upside from retail/business banking turnaround, (3) cost-out, (4) improving disclosure. Risks: (1) light provisions at 51bp, (2) "bad boy" workout. PT $47.50 (DCF, SOTP, Internat’l peers).

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