CBA

Reporting Season Final Update (March 2007)


Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Commonwealth Bank of Australia (CBA) Update


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 (CBA) Share Trading Update


Commonwealth Bank (CBA) have a lifted price target to $53.10 (up 7%) and a Hold share trading recommendation from analyst Citigroup Investment Research (CIR). The analyst have lifted their share price target since they have lifted their EPS estimates of 3 to 5 percent. The analyst's upgrades are the result of underlying franchise improvement, an extension of the positive operating environment and larger share buybacks from FY08, reflecting an end to an APRA-imposed embargo and the transition to Basel II. It's difficult to imagine a more positive environment for Australian bank and wealth management companies. Investment earnings, bad debts and, to a lesser extent, trading income will normalize in time. CIR considers CEO Norris and his team have taken severalpositive actions toward harnessing the power of the franchise. Revenue growth remains sub-peers and current investment levels may not yet prove to be sufficient. Meanwhile, CIR have a Buy 1 shares recommendation and a price target of $57.50. In the analyst's eyes, CBA delivered a positive result surprise ($100m above us), with Cash NPAT up 18% seq. Key drivers were (1) IEAg of 8% (2) margins down 3bp (-7bp CBA format) (3) cost control in the bank division (4) lower BDD supported by flat NPL's. Result quality was partly impacted by (1) lower tax rate - CBA target 28.5% (2) one-off gains (more to come in 2H07) (3) retail div'n rev g was only 4% (4) no GRCL. CBA flagged (1) 1st 6 weeks of this half have kicked off very well (2) lead indicators for retail div'n bode well for LT improvements there (3) further BDD reductions expected from de-risking in cards (4) further cost saves targeted (5) one-off gains should continue and AWG asset could contribute. UBS finds that CBA is driven by (1) flowthrough of strong interim result (2) improved retail div'n revenues (3) ongoing low BDD (4) improving corporate div'n (4) further cost saves built into forecasts. UBS spots the following key drivers (1) stock is cheap post upgrades at 13.6x 08E (diluted), 1% sector premium (2) the register beckons (3) retail bank div'n fix lead indicators are improving (4) corporate bank div'n accelerating (5) wealth div'n delivering well. Key risks (1) retail div'n still offers risk (2) WM gains are part cyclical.

Commonwealth Bank of Australia (CBA) Share Trading Recommendation


Commonwealth Bank of Australia (CBA) have a Neutral 1 share trading recommendation and a price target of $50 from analyst UBS. According to the analyst wealth management should be a key driver of a strong CBA 1H07E result (14/2/07, Cash NPAT $2,154m Co format). WM is expected to contribute 18% of Group NPAT. Evidence of WM cross sell using CommSee shall be critical. The analyst expects a strong result from the Funds Management division, with NPAT of $250m (up 12.5% seq). The strength of the markets and improved fund flows should deliver strong average FUM growth. They also expect some rotation into higher margin equity funds to offset some of the underlying margin pressure. Ongoing cost saves should enable further operating leverage. They expect a solid result from the Insurance div at $141m (up 6.5%) as MOS accounting prevents the full upside being seen. They expect (1) growth in Planned Profits given strength in inforce premiums (2) improvements in general insurance sales, esp home & contents (3) GI also likely to benefit from an ongoing benign claims environment. The analyst finds the following key positives for Commonwealth Bank (CBA): (1) register short squeeze, most under-held bank (2) stabilisation in mkt shares (3) deposit spread benefit (4) WM upside (5) recent management re-jig. Issues: (1) unlikely to achieve lead status in retail bank satisfaction by 08 (2) culture change is LT. Our price target is derived from a combination of DCF, SOP and international peers.

Commonwealth Bank of Australia (CBA) Share Trading Recommendation


Commonwealth Bank of Australia (CBA) have a Neutral 1 share trading recommendation and a share price target of $50 from analyst UBS. They expect CBA to report a strong 1H07 result, with Cash NPAT (UBS format) of $2,145m ($2,154m CBA format). EPS is expected at 162.6cps (up 9.2% seq & 11.4% on pcp). Interim div is forecasts at 107cps. Divisional forecasts: Banking $1,761m, driven by Business & Insto up 8.4%, Retail up 7.1%. Funds Management should be strong at $250m (up 12.5%) & Insurance $141m (up 6.5%). According to the analyst: revenue could surprise on the upside given: (1) Seasonality, more days in 1H accruing interest (2) Credit growth remains strong (3) Deposits stronger than expected should help margins (4) Rate rises help deposit spreads (each 25bp adds $25m pre tax p.a.) (5) Rallying mkts will boost WM & CommSec. UBS expect BDD to remain at low levels (17bp) as CBA credit card portfolio charges run off. Corporate losses remain low. Costs should remain in line as the full period WNB benefits & IT savings offset investment. UBS sees the following key positives for CBA: (1) register short squeeze, most under-held bank (2) stabilisation in mkt shares (3) deposit spread benefit (4) WM upside (5) recent management re-jig. Issues: (1) unlikely to achieve lead status in retail bank satisfaction by 08 (2) culture change is LT (3) most susceptible to retail competitive pressures. Our price target is derived from a combination of DCF, SOP and international peers.

Commonwealth Bank of Australia (CBA) Shares Tip


Commonwealth Bank of Australia (CBA) have reiterated their observation that CBA is set to deliver a strong first half result given strong funds management earnings, deposit margin benefits from rising cash rates and a flatter BDD trend than peers. MRE now add to this list the likelihood of a strong 1H insurance result. Given this and the fact that NAB has moved to a 7% premium to the sector, MRE are swapping their preference order of CBA and NAB ahead of CBA’s interim result (CBA now second, NAB third).CBA is due to report their interim result on 15th February 2007, and is expected to go ex-dividend on the 20th February 2007. Although a small component of the group at 7% of earnings, CBA’s insurance business has been a significant contributor to group performance, with operating earnings (pre the CMG Asia sale) up 38% in FY06. This was driven by a combination of favourable claims experience, flat operating costs and better claims management. While recognising CBA has a number of issues (weak SME performance, tight capital position), MRE continue to believe the market is underestimating the chances of CBA delivering on its FY07 guidance. Given this and the fact that NAB has moved to a 7% premium to the sector, MRE are swapping their preference order of CBA and NAB ahead of CBA's interim result (CBA now second, NAB third). MRE note this is largely a trading view, and for CBA to maintain that position post its result will require greater confidence in the short-term outlook for the SME and Personal businesses. MRE's preference order among the majors is now WBC, CBA, NAB, ANZ, SGB.

Commonwealth Bank (CBA) Stock Recommendation


Commonwealth Bank (CBA) has a Neutral 1 stock recommendation and a $47 share price target and valuation from investment banker and stock analyst UBS. CBA released a first quarter update today in the lead up to other banks releasing their reports starting this Thursday. The stock analysts note that today's update was Commonwealth Bank's first attempt at a quarterly trading statement and there was a lack of financial data which limits the reports' usefulness. Credit growth seemed to be holding up to the two rate hikes.

Commonwealth Bank of Australia (CBA) Shares


Commonwealth Bank of Australia (CBA) has been given a Neutral rating with a share price target of $47 by stock analyst UBS. They note that they are getting "incrementally positive on CBA: (1) near-term stabilisation in mkt shares (2) working through its 2007 capex hole via investment in 2006 (3) recent mgmt re-jig (4) CBA has been the most under-held bank by institutions." Their price target is derived from a combination of DCF, SOP and international peers.

Superannuation Stocks


Macquarie Research Equities (MRE) have highlighted some superannuation stocks that will be advantaged from increased capital inflows from the strong super inflows during this year as well as a consequence over the proposed changes to superannuation regulations announced in the 2006 Budget made superannuation.

Australian Banking Sector


Macquarie Research Equities prefers ANZ and Commonwealth Bank (CBA) amongst the majors in the Australian Banking Sector. ANZ Bank has an Outperform recommendation an a 12 month share price target of $28.20. Commonwealth Bank (CBA) also has an Outperform recommendation and have a 12 month stock price target of $46.50. National Australia Bank (NAB) has a Neutral recommendation and a 12 month share price target of $36.30. Westpac (WBC) has a Neutral stock recommendation and a 12 month share price target of $23.75. St.

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