Commonwealth Bank (CBA) Update

Submitted by Jim Thesiger on 10 June, 2008 - 14:31

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.