CommBank

CommBank aka Commonwealth Bank shares have an upgraded broker call of Outperform from stockmarket analyst Macquarie Research Equities. Last Friday, the analysts upgraded their recommendation to Outperform on CBA, and moved it to their key pick in the bank sector. The following article reviews the outlook for CBA in more detail, and highlights that market consensus forecasts for FY08 are possibly too bearish. MRE expect FY08 guidance commentary at CommBank's August result to drive further upgrades, and believe CBA is one of the only banks currently providing value and price catalysts, beyond those two banks yet to go ex-dividend, NAB (1 June) and SGB (13 June). CommBank should extend current guidance to FY08, driving upgrades: At its August result, the analysts expected the Commonwelth Bank to continue to guide for 'EPS growth which meets or exceeds peers' – consistent with its FY07 guidance and Ralph Norris’ original guidance for the three years to FY09. Currently, this would imply FY08 EPS growth of ~9–10%, approximately 2% above current FY08 consensus for CBA. Accordingly, while doubters will remain, the analysts expect management's confidence at the FY07 result to provide a strong chance of upgrades. Institutional, financial markets and wealth management remain the key drivers for now: Rejuvenation of CommBank's institutional banking and global financial markets operations, combined with continued good growth in wealth management are likely to remain CommBank's key drivers in the short term, with revenue growth from retail banking expected to improve as FY08 progresses. While the analyst recognises that this reliance on institutional and financial markets increases the uncertainty in Commbank's growth in the short term, the analysts are more comfortable that current relative pricing more than factors this in. Some green shoots in retail, key is holding onto recent gains: The March quarter improvement in CBA’s retail market share trends provide some encouraging signs, however analysts believe this business is still in the early stages of a turnaround with part of the recent improvement related to a specific one-off campaign. The key short term is to ensure the improving trend in CBA's customer satisfaction is maintained and gradually converted into an improved revenue trend as FY08 progresses. While the recent departure of Michael Cameron poses a short term risk to maintenance of this momentum, Ross McEwan has the background to drive this on at least an interim basis. They have upgraded their earnings in FY08 up 2%, and FY09 up 2.5%, largely reflecting upgrades to business lending growth, financial markets and other income. In the analyst's view, CommBank is currently the only major bank providing value and price catalysts: CBA's banking operations are trading at a ~5% discount to peers (excluding wealth from all), consensus FY08 forecasts are ~2% too low. It also has medium-term turnaround potential and no pending CEO succession issues. These drivers explain last Friday's upgrade in CommBank's rating to Outperform and its move to their key sector pick.