Commonwealth Bank (CBA) Update

Submitted by Jim Thesiger on 10 June, 2008 - 13:31

Commonwealth Bank (CBA) has a share price target of $50.00 from Australian stockmarket analyst Macquarie Research Equities.

Commonwealth Bank (CBA) Upgrade to Buy

Upgraded to Buy following significant underperformance YTD:

Year to date CBA has fallen 26%, underperforming the market by 15% and the banking sector by 6%. CBA is now trading at 11.2x FY09E PE, 1.3 standard deviations below its LT average of 13x. We see this as a good opportunity to begin accumulating CBA.

Risk from "bad boys" decreasing:

With Cento's debt now extension now pushed to Dec-08 (pending requirements being met in Sept-08) and Allco also extended, we now see it as possible that CBA could escape its substantial "bad boy" exposures relatively un-scathed. We forecast CBA's BDD charges to loans & advances will reach at 25bp in FY08E vs ANZ at 45bp & NAB 38bp. The key risk to CBA remains the potential writedown to its large ABC Learning notes position or a deterioration in these "bad boy" positions.

CBA's strong capital position is a key positive:

CBA provided much improved disclosure of its Basel II capital. This showed a 27% fall in RWA & Tier 1 of 8.2% as at 1/1/08 (pre Interest Rate Risk in the bank book adjustment). This compares with ANZ (6.8%), WBC (7.4%) & NAB (6.5% BIS I). CBA's capital position would look even stronger using less onerous methodologies used overseas relative to APRA's very conservative approach.

Buy rating and $50 PT (from Neutral, $47.50 PT). DCF, SOTP & peers.

We have upgraded CBA to Buy. Positives: (1) strong capital position (2) upside from retail/business banking turnaround, (3) cost-out, (4) improving disclosure. Risks: (1) light provisions (51bp), (2) "bad boy" workout (3) ABC Learning Notes.

Download our FREE App


Signup for Free
Don't miss out on your free share trading articles.


Free Risk Money Management Calculator for those who sign up!