It’s What CBA Didn’t Say

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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 Greg Peel

There’s an element of catch-up stemming from Commonwealth Bank’s ((CBA)) third quarter trading update. CBA is the only one of the majors to account on a standard July-June basis, while the others are all Oct-Sep. Hence we haven’t heard from CBA since its Feb half-yearly, while the others have all reported their half-yearlies this last week or so.

On that basis, the analysts are generally not concerned that the trading update appears weak. Well, at least some of them aren’t – JP Morgan suggested the update was “decidedly weak”, and others were surprised by the extent of bad loan provisions for single names. But CBA is really just pulling into line with its peers.

The big news, however, is the absence, for the first time in a long time, of stock-standard guidance that CBA would meet-or-exceed peer earnings growth. While some analysts had been waiting for this anyway, the stark omission was nevertheless material. Management has noted a slowing of credit growth, a continuation of difficult debt markets and high cost of funds, and a drop in wealth management in the weaker market (although one presumes this will pick up again given the current bounce). Trading income has picked up given volatility, but CBA has lifted expected bad debt charges to 0.23% of gross loans.

While the latter was more than some analysts expected, the good news is a $30m impairment expense is more about single-name exposures than it is an overall erosion of credit quality. In other words, CBA has not seen a series of small corporate implosions as a result of higher interest rates and a tighter debt market, and this is somewhat of a relief.

What it has seen is a mark-to-market loss of $34m on life insurance annuities, reflecting the weaker market.

The good news is that Commonwealth’s capital base is strong, and that’s heartening for Australia’s biggest (so far) bank. But Merrill Lynch is worried about a worsening trend in low cost deposit balances, and ABN Amro is worried about the bank’s business mix.

Overall, there were no shocks in the update – it was just a bit worse than expected, leading to general earnings forecast reductions of 1-2%. Analysts are concerned about bad debt exposure, particularly that it may still yet be light-on, and concerned about the bank’s ability to grow earnings. That CBA would think it can no longer out-do its peers was largely already expected, but the obvious question now is: Why is the stock still trading at a PE premium to peers?

Following the update, the B/H/S ratio in the FNArena database remains at 1/6/2. (This only adds to nine because Aspect Huntley has not updated since February). The single Buy comes from – shock, horror – JP Morgan. But this is a sector only rating, meaning JPM expects CBA to do better than the field. The broker has an Underweight rating on the sector.

The average target has crept up to $46.26, but this is a bit of a catch-up on recent sector strength.

CBA suggested it is looking at St George ((SGB)), but analysts don’t expect a bid. CBA is the least likely bank to win over the ACCC given its dominant size.

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