CBA - Commonwealth Bank of Australia

[honey85]

Announcement just been made on asx.

http://business.theage.com.au/business/cba-expects-firsthalf-profit-slump-20090202-7vmv.html

Opinion anyone?


Honey85
newbie

 

[dirty_harry]

I'd say hang in there for long term. There is a risk of dilution from capital raisings with all the big 4 if things get really bad, but they are ridiculous cash machines in Australia and their competition is being wiped out. They are still making huge profits while making large provisions but I think the key is how bad the housing market gets from here on.

 

[Econinvestor]

For parallels to Australian banks, you've got to be concerned that US banks, even the large commercial ones like Bank of America, have been hammered so badly. I've been following the stock a bit and it has been hugely volatile. Last night, for example:

Bank of America Corporation BAC 6.00 -0.58 (-8.81%)

Before this it has gone up and down some days near 15 - 20 %.

What is happening there? Does anyone think there are lessons for Australian banks?

 

[oldblue]

The US banks have been shot down by their exposures to toxic derivatives as well as bad lending.
Aussie banks have had minimal involvement with these derivatives, or so they say and I would think they wouldn't dare to have not come clean about it by now if that was not the case.
Sure, they will have more bad debts and that's what they are increasing their provisions for. I'd be more worried about some of the regionals such as BOQ and BEN who seem to be content to see their provisioning actually fall as a proportion of assets.
Some reduction in divs is almost inevitable but yields will still look pretty good in these times of lower interest rates, even if divs were to be cut in half!

 

[honey85]

Jumped 7.8% now. Wonder if it would last... would love to see how the market will react to the interest rate cut today.

honey85
newbie

 

[oldblue]

Jumped 7.8% now. Wonder if it would last... would love to see how the market will react to the interest rate cut today.

honey85
newbie

I would say that the market has already priced in a fairly substantial cut, at least as far as the banks are concerned.
Let's hope it's justified.

 

[vincent191]

Don't forget short selling is still ban for bank stock. What will happen when the ban is lifted in March? Will today's gains be wiped out when short selling comes back?

Many overseas hedge funds seems to think Australian banks are "over-valued" and are tipped to start shorting Australian banks when the ban is lifted.

I am taking some profit today and be prepared to forego the interim dividend. CBA goes ex-dividend 16 Feb.

Anyone got a different view point???

 

[Old Mate]

I don't think this surge will hold up so I've pulled out with a nice little profit. Will no doubt be proven wrong though

 

[nomore4s]

I don't think this surge will hold up so I've pulled out with a nice little profit. Will no doubt be proven wrong though

I think we could see a rally till the 11th of Feb when the full half year results are released and then we could see a sell off, my

 

[Econinvestor]

I think the thing to focus on with CBA is their *phenomenal* revenue and profit performance over a time when everybody was predicting "the new great depression".

A stock is the net present value of its future stream of profits, so news affecting profits is all we need to know. A quick back of the envelope calculation, based on fundamentals, suggests a target price:

The stock was trading at around $43 even as late as October last year, as things were starting to crumble for other stocks. Their expected profit is 2 bn (according to the ASX announcement of Feb 2), which is "16% lower than than the prior comparative period" (read the announcement and check).

Therefore the target price should be $43 less 16%, i.e. approx $37, if we think that the original market valuation -- which incidently stood March through October 2008 -- is accurate.

The current price is $29... need I say more?

 

[GumbyLearner]

I think the thing to focus on with CBA is their *phenomenal* revenue and profit performance over a time when everybody was predicting "the new great depression".

A stock is the net present value of its future stream of profits, so news affecting profits is all we need to know. A quick back of the envelope calculation, based on fundamentals, suggests a target price:

The stock was trading at around $43 even as late as October last year, as things were starting to crumble for other stocks. Their expected profit is 2 bn (according to the ASX announcement of Feb 2), which is "16% lower than than the prior comparative period" (read the announcement and check).

Therefore the target price should be $43 less 16%, i.e. approx $37, if we think that the original market valuation -- which incidently stood March through October 2008 -- is accurate.

The current price is $29... need I say more?

Best bank in OZ by far! Always been an admirer of CBA. They are a bank that really check out WHO they are lending to and do the groundwork before saying yes. Great bank with great products.

Of course I thnik they are the best IMHO! But Do Your Own Research! Plenty out there without the same practices! JMO!

 

[Julia]

I think the thing to focus on with CBA is their *phenomenal* revenue and profit performance over a time when everybody was predicting "the new great depression".

A stock is the net present value of its future stream of profits, so news affecting profits is all we need to know. A quick back of the envelope calculation, based on fundamentals, suggests a target price:

The stock was trading at around $43 even as late as October last year, as things were starting to crumble for other stocks. Their expected profit is 2 bn (according to the ASX announcement of Feb 2), which is "16% lower than than the prior comparative period" (read the announcement and check).

Therefore the target price should be $43 less 16%, i.e. approx $37, if we think that the original market valuation -- which incidently stood March through October 2008 -- is accurate.

The current price is $29... need I say more?

I'd hate to suggest you might be ramping this stock.
A somewhat more objective view might be this from "The Australian", taken with thanks from another thread:

n the past year Commonwealth Bank, under the watch of Ralph Norris, has seen its share price underperform the rest of the banking sector, falling 51 per cent to its latest close of $26.90, which equates to a loss of $40 billion from its market capitalisation.

The next biggest loser was ANZ, which has watched 46 per cent wiped from its share price.

The biggest issue is bad debts. To this end, investors will scrutinise Commonwealth Bank's provisions, including its exposure to commercial property, small business loans and big corporates.

Everything follows from increased bad debts. For instance, a surge in bad and doubtful debts pushes up capital ratios because there is a greater likelihood that capital will be used for the greater than expected losses. In the current climate, this means additional capital raisings, reduced dividends, reduced returns on equity, reduced price-to-book ratios, reduced price-earnings ratios and further share price falls.

To date the majority of bad and doubtful debt charges have come from the business sector, mainly due to large provisions against a small number of highly leveraged organisations such as Allco, ABC Learning, Babcock & Brown and Centro Properties.

But as the economy deteriorates, and the contraction in global credit markets intensifies, provisions will spread across the business sector as more SMEs (small and medium enterprises) default on their loans.

Credit Lyonnais Securities Asia (CLSA) argues in its latest report that bank shares will fall a further 34 per cent from current levels.

The broker slapped a price target of $9.30 on ANZ, which is currently trading at $13.27, $14.32 on NAB, which is trading at $19.73, and $16.18 on Commonwealth Bank, now trading at $26.90. CLSA is still reviewing Westpac following its merger with St George Bank.

CLSA's report on the banking sector assumes each bank will raise more capital, and for 2010 it forecasts that ANZ and NAB will cancel dividends and report losses. It estimates that in 2009, ANZ will report bad-debt expenses of $2.7 billion, and in 2010 bad debts will blow out to $3.6 billion, resulting in a pre-tax loss of $352 million.

In NAB's case it forecasts bad-debt expenses of $4.7 billion in 2009, blowing out to $6.1 billion in 2010, resulting in a pre-tax loss of $2.5 billion.

For Commonwealth Bank it expects bad debts to jump from $930 million in 2008 to $3.3 billion this year and $4 billion next year. It forecasts Commonwealth Bank will make a profit of $923 million in 2010, which is a far cry from the $6.2 billion pre-tax profit it posted in 2008.

Potential bad and doubtful debts include a $137 million exposure to OZ Minerals, a $1.2 billion exposure to Centro Properties, exposures to Babcock & Brown and Babcock & Brown Power, Storm Financial, Asciano, PBL Media and City Pacific.

Bad and doubtful debts that have now become bad debts, according to UBS, tally up to more than $1 billion, mainly from Allco Finance Group, ABC Learning, Commander and margin loans.

But CLSA isn't the only broker with a negative outlook on the banks. Back in December, Wilson HTM put a sell recommendation on NAB, ANZ and Westpac on the basis that credit quality would worsen and result in EPS dilution from more capital raisings.

According to Iress, Wilson HTM and CLSA are the first two brokers to put sell recommendations on ANZ and Westpac. In the case of NAB, Austock has joined Wilson and CLSA with a sell recommendation on the stock and Commonwealth Bank has attracted sell recommendations from CLSA, Goldman Sachs, Deutsche Bank and ABN AMRO.

Given the gloomy prognosis for the banks over the next couple of years, the regulators will no doubt be putting pressure on the banks to lift their tier-one capital. APRA officially only requires a 4 per cent ratio, but the guidance is more around 7.75 per cent and is fast moving to 9 per cent.

In the case of the second tier banks such as Suncorp, the outlook is even gloomier. Suncorp releases its results in the next few weeks and all eyes will be on its provisions and impairment charges for property and development. All eyes will also be seeking any signs that its development finance division is still growing.

Although Suncorp dodged a bullet when the Rudd Government introduced bank deposit guarantees and debt, as property prices fall and construction and property development projects go bust, Suncorp will again come under pressure to sell its banking business to better concentrate on getting its general insurance business up to scratch and ensure the integration of Promina succeeds.

Despite the recent profit warnings, the latest profit season will undoubtedly contain further bad news and more shocks as the great deleveraging gathers pace.

Investors will need to prepare themselves for even more bad news in the form of bigger dividend cuts, more equity raisings -- either through placements or dividend reinvestment plans -- and further balance sheet shrinkage to cope with the credit crisis.

The question is whether investors will get sick of dilutive equity raisings. If they do, the number of receiverships will start going up and the banks' bad and doubtful debts will soar.

 

[oldblue]

Best bank in OZ by far! Always been an admirer of CBA. They are a bank that really check out WHO they are lending to and do the groundwork before saying yes. Great bank with great products.

Of course I thnik they are the best IMHO! But Do Your Own Research! Plenty out there without the same practices! JMO!

CBA may or may not be the best bank in OZ but as Julia's post mentions, they have also had their share of bad lending/bad debts.
The important point is that the four majors have all reacted to the new circumstances with increased provisioning which, although will hurt profits meanwhile, will stand them in good stead in the future.
By the way, profits and divs could stand a cut by half and the yield would still look pretty good in today's low interest environment.

 

[Logique]

Suspect this is just a relief rally, the (still only a) prediction of half yr earnings not being as bad as analyst predictions.

When calmer analysis is possible, it might sink in that half year expected profit, on CBA's recent announcement, will be 16% lower than than the prior comparative period.

 

[juw177]

A stock is the net present value of its future stream of profits

You are assuming past profits predicts future profits. They don't, however their balance sheet might. Unfortunately, CBA like all the other banks have not yet come clean with their losses so nobody really knows, but if they have to hide it, you can bet it is bad.

All the big US banks posted record profits in 2007. It does not stop them from imploding when the true value of their balance sheet catches up to them.

 

[oldblue]

Bad debts don't all become apparent together - it's a " moving feast" - no, that's not a good description but I hope you get my drift.
So it's not necessarily a case of not coming clean but more a matter of not having a crystal ball. At least, the majors are doing the sensible thing and building up their provisions.

 

[juw177]

oldblue, you are wrong.

Provisions do not take away risk, nothing can. The end result will be that someone takes the loss, and it will either be the bank or the government through taxpayer money.

Regulation does not require that they disclose the risk taken by their level 2 / 3 assets let alone write them down to market price . If things are bad, banks have no incentive to disclose. Transparency does not require any crystal ball, the free market will sort it out as it always does.

 

[oldblue]

No, I'm not saying that they are taking away the risk. Merely that they are increasing their provisions, at the expense of currently reported profits, so that when the bad debts do materialise they have some capacity to meet them.

 

[juw177]

Provisioning for bad debt does not give them any more capacity to meet their debt obligations as it does not create any capital or reduce risk exposure. But it is a step in the right direction to start being more honest with the risk they had been taking on.

 

[oldblue]

Provisioning does give them more capacity to meet bad debts insofar as it reduces reported profits and thereby reduces the capacity to pay out earnings as dividends. Provided, of course, that the company doesn't increase the payout ratio to compensate for the lower earnings.