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Commonwealth Bank report and what it means for the market

Nicholas Forsyth

Market Matters

Big 4 Banks Market Cap and Their Weighting on the Index

Commonwealth Bank (CBA) Result

Today's result was solid, despite some swings and roundabouts.

The Good

  1. Net profit increased to $9.45 Billion
  2. Tier 1 capital came in at 10.60% Vs. The expected 10.10%
  3. Bad and Doubtful Debts were very low in 4Q16 ($265mn vs. $427m in 3Q16)
  4. Maintained their $4.20 dividend

 

The Not So Good

  1. Underlying trends appeared weak with most business units seeing their profits decline half-on-half (HoH)
  2. Operating conditions remain tough, top line growth is hard to come by, managing costs and improving productivity remains key.

 

We believe that with today's solid result, and in particular the tier 1 capital 'beat,' which should alleviate some of the concerns about raising additional capital to satisfy regulatory standards, a lot of fear within the market will be dispersed. We expect to see the large stockpiles of cash, which are currently on the sideline, get brought into the market and create another move to the upside for CBA.

This view is also supported by the current discrepancy between CBA's Earnings-Per-Share (EPS) and the CBA share price. On that basis, we believe that CBA is due for another move to the upside and expect the market to move with it.

Commonwealth Bank (CBA) Share Price Vs EPS

source: Shaw and Partners

Correlation Between CBA Share Price and ASX 200 Index

As we highlighted earlier CBA makes up 8.5% of the ASX 200 index. Since 2015 the CBA share price and ASX 200 index have been strongly correlated.

What Today's Result Means For CBA Share Price and The ASX200 Index

The CBA report, combined with EPS discrepancy, will help drive CBA to our new target in the short-to-medium term.

Market Matters are happy buyers of CBA at today's close: $77.40.

At Market Matters, we believe that ANZ and NAB will lead the charge in the banking sector short-term, as the likelihood of them being required to raise capital has diminished substantially. The market is currently chasing stocks that have been hurt over the last 12 months, as it hunts for value in the relatively expensive market. For example, ANZ which has been down 13.6%, NAB down 16.7% but CBA only down 4.1%.

We are happy with ANZ and NAB, as they are likely to make up on lost ground and we are more than happy to buy CBA as a conservative medium-term yield bearing investment.

As the ASX 200 index increases, we will see a number of opportunities in the short-to-medium term. Particularly, in the finance and resources sectors. We have provided some examples of stocks that we like as a BUY during this reporting period.

Join now for a free 14-day trial and get access to our target price for CBA, and our new target level for the index and 3 buys we like in the short-to-medium term(VIEW LINK)


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Nicholas Forsyth
Nicholas Forsyth
Director
Market Matters

Market Matters is an online investment and share trading advisory service designed for those that want to take their wealth further. We specialise in advice for active share market investors, including those new to the markets or those with a Self...

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