CBA: Expensive And Justified, Or Maybe Not?

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

Commonwealth Bank's retail and business divisions rank highly and, Bell Potter believes, should justify a premium to other major banks. Other brokers are not so convinced.

-Asset sales could be a differentiator
-Budget support for business a positive
-Is the stock too expensive?
 

By Eva Brocklehurst

Is Commonwealth Bank ((CBA)) deserving of its premium to other major banks? Bell Potter believes so, assessing the bank's returns are still the best among peers. Moreover, the bank's retail and business divisions have the underpinnings of long-standing outperformance and rank highly in terms of productivity and efficiency.

CBA is also managing costs to drive profitable growth as opposed to "blindly pushing for volume and market share", the broker asserts, highlighting a Buy rating and $73.50 target.

The bank's FY20 result showcased a strong balance sheet and good underlying asset quality as well as a "decent" final dividend and the broker, not one of the seven stockbrokers monitored daily on the FNArena database, considers the trading premium is justified.

Macquarie differs, believing margin pressures and a lack of volume growth mean the outlook for major banks is challenging. The broker recently upgraded peers ANZ Bank ((ANZ)) and Westpac ((WBC)) but kept Commonwealth Bank on an unchanged Underperform rating, assessing the stock is too expensive.

Citi has pointed out asset sales could be the differentiator in terms of dividend and capital, although this will ultimately be determined by credit quality. Moreover, there is no certainty that loan provisioning will be enough given the economic impact of the pandemic continues to play out.

Divestments could add 58-68 basis points to the level 2 CET1 ratio of 11.6% upon completion but, even so, Morgans does not expect capital returns until there is more assurance regarding the macro economic outlook.

Morgans lingers between the two extremes in terms of its rating, accepting the quality of the retail franchise was evident in the FY20 results but continuing to believe the stock is expensive relative to the other major banks.

The broker is of the view that home lending will prove to be more defensive from an asset quality perspective compared with institutional and business lending and this augurs relatively well for CBA.

Credit Suisse prefers those banks that are trading below book value and ranks the other major banks ahead of CBA, while Morgan Stanley, in the wake of the FY20 results, considers there are still several issues outstanding regarding credit quality.

The latter has ascertained the federal budget will accelerate business investment and loan growth and this should provide a benefit for banks. Nevertheless, the support for business will not materially reduce the risk of failures in those industries most adversely impacted by the pandemic, and which are relying on loan repayment deferrals and/or JobKeeper.

Positive Catalysts

If bad debt charges are -25% below current estimates over the next three years this could add around $0.83 per share to Macquarie's valuation for the stock. Nevertheless, while recognising reduced capital intensity is a likely catalyst for long-term sustainable returns, the broker would rather wait until March/April 2021 in order to become more confident.

An impairments experience 25% better than currently forecast should provide for 7% upside to current valuations across the major banks, Macquarie calculates, with the greatest upside envisaged for ANZ, National Australia Bank ((NAB)) and the smallest for CBA.

The FNArena's database has six Hold ratings and two Sell ob Commonwealth Bank. The consensus target is $67.09, signalling -1.1% downside to the last share price. Targets range from $58.50 (Macquarie) to $74.80 (Credit Suisse). The dividend yield on FY21 and FY22 forecasts is 3.9% and 4.5%, respectively.

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