Australia | Apr 19 2007
By Chris Shaw
Yesterday the Commonwealth Bank (CBA) released its third quarter trading update to the market and reiterated earnings guidance, meaning there has been little change to earnings estimates for the stock.
Brokers have not made any significant adjustments to price targets either, the FNArena database showing an average target now of $54.27 compared to $53.87 prior to the update. There have been no upgrades to ratings, the database showing the stock as rated Buy and Accumulate once each compared to two Sell recommendations and six Hold ratings.
This equates to a Sentiment Indicator reading of 0.1, the lowest among the major banks given Westpac (WBC) is at 0.5, ANZ Banking Group (ANZ) scores a 0.4 and National Australia Bank (NAB) and St George Bank (SGB) both score 0.2.
So why is the bank the least preferred in the sector? Valuation, according to GSJB Were, which suggests investors switch into Westpac for its more attractive relative valuation and the fact CBA’s growth is of low quality. Following the update the broker reiterated its view, pointing out while earnings guidance has been maintained and the strong earnings momentum of the first half has continued on into the third quarter the growth remains of poor quality.
Credit Suisse suggests much the same thing, as it notes the earnings guidance provided by management is in line with its estimates for an increase of around 15%, which is above the average for the sector of around 12%. Despite this the broker can muster only a Neutral rating on the bank as it suggests while the below system growth rates are benefiting margins this year they may cut into earnings growth in future years.
In addition, the broker suggests the bank doesn’t really deserve its current premium rating to the other major banks given it is persistently losing market share in the domestic banking sector, so it has the bank as its least preferred exposure.
The bank fares little better at Macquarie, being rated the broker’s number four pick in the sector as while the trading upbeat was positive the broker suggests there needs to be signs of a turn around in its retail operations before the market can be expected to place a more positive rating on the stock compared to its competitors.
The exception to this line of thinking is UBS, which has maintained its Buy 1 rating and market leading (at least according to the FNArena database) price target of $57.50. While acknowledging earnings growth in the third quarter looks good, the broker’s positive view is predicated on the idea the turnaround in terms of operational improvements is on track and so offers greater upside than the rest of the sector.
UBS also notes the stock has recently lost the 5% sector premium on which it was trading, but if the wealth management operations are valued equally across the sector the broker estimates the stock is actually at a 3% discount to its peers and so is worth buying, particularly as cost and operating improvements offer upside risk to earnings estimates.
Whether or not the bank is cheap relative to its peers, the consensus view in the market is upcoming profits results for the banks should be good. With all of the bank share prices moving more or less in the same direction, the short-term trend for the stock appears to be positive assuming the market maintains its recent upward momentum.
Commonwealth Bank shares today are weaker in a falling market, as at 1.40pm the stock was down 67c or 1.3% at $52.63.