Views On CBA Little Changed After Briefing

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This story features COMMONWEALTH BANK OF AUSTRALIA.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Commonwealth Bank ((CBA)) yesterday gave a presentation on the outlook for its retail banking operations and the market’s reaction was relatively ho-hum, with only minor revisions to market forecasts flowing through as a result of the update.

ABN Amro lifted its estimates by around 1% and this was among the larger revisions following the briefing, the broker taking the view recent volume data in the market indicates the bank is generating mortgage growth at above system levels.

Adding this to the fact it has the largest number of broker relationships in the market and has a diversified funding base and ABN Amro sees the bank as very well placed in the market, which supports its Buy rating.

Also supportive in the broker’s view is the bank’s ability to leverage its size and scale, which is generating some cost savings. Credit Suisse agrees there is evidence of some cost savings being achieved but suggests these are already factored into the market given the bank’s current share price, so it in contrast rates the stock as Underperform.

The difference in views is clear in earnings forecasts, with Credit Suisse forecasting EPS (earnings per share) of 388c this year and 420c in FY09, while ABN is forecasting a relatively similar FY08 outcome of 390.1c but a more bullish 430.9c for FY09.

Slightly more conservative is Citi, which expects EPS next year of 411.8c after 377.5c this year, while Deutsche Bank is forecasting 383c and 409c respectively. Thomson One Analytics shows median price forecasts of 385c and 420c.

Another reason behind the differences in rating from ABN Amro’s Buy to the negative view of Credit Suisse is relative valuations, as on ABN’s numbers the stock is on a FY09 P/E of 13.4x, while Credit Suisse estimates the bank is on a multiple of 14.4x on a 12-month forward basis and this represents a 12% premium to the sector.

For UBS it remains too early to get excited about the retail division, as while there are signs the turnaround in performance is progressing there remains a long way to go. The broker is positive on the bank’s decision to raise housing interest rates as it should help alleviate margin pressure, while GSJB Were also suggests the turnaround is likely to be a lengthy process so it has retained its Sell rating on valuation grounds.

Merrill Lynch leans more to the ABN Amro view in suggesting the update is indicative of some potential upside, but also accepts it remains early days and so it continues to rate the stock as Neutral.

Overall the FNArena database shows the stock is rated as Buy three times, Hold five times and Sell twice, with an average price target of $58.85. Thomson One shows a median price target of $60.00.

Shares in Commonwealth Bank today are weaker and as at 12.00pm were down 56c at $57.34.

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