Market Matters Report / Commonwealth Bank Full Year Report 2016

By Market Matters 11 August 16

Commonwealth Bank Full Year Report 2016

Commonwealth Bank Full Year Report 2016

 

Commonwealth Bank Report and What it Means For The Market

Dear Investor,

Today, Commonwealth Bank released their full-year result. Like many investors, Market Matters have been buyers and holders of CBA for quite some time. The banks and in particular CBA have offered fantastic returns over the last 5 years with CBA up over 60%, not including dividends which have been substantial. 

Why does today's result have a bearing on Australian equity markets?

1. CBA is the largest company on the ASX: With a Market Cap of AUD $132 billion CBA makes up 8.5% of the index, so it has a real bearing on where the index goes.

2. Broad exposure to Australian economy: CBA represents an excellent gauge of domestic economic trends.


3. CBA will set the sentiment for all Big 4 Banks: Good or Bad; CBA will significantly influence the banking sector over the coming months and that will clearly have a bearing on the broader market.
 

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

  • Net profit increased to $9.45 Billion
  • Tier 1 capital came in at 10.60% Vs. The expected 10.10% 
  • Bad and Doubtful Debts were very low in 4Q16 ($265mn vs. $427m in 3Q16)
  • Maintained their $4.20 dividend
The Not So Good
  • Underlying trends appeared weak with most business units seeing their profits decline half-on-half (HoH)
  • 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

Target Price for CBA is now $83-$85

The CBA report, combined with EPS discrepancy, will help drive CBA to our new target of $83-$85 in the short-to-medium term.

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

Target Index for the ASX 200 is now 5,700 - 5,750 

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.

1. Macquarie Group (MQG)

Cheap relative to the market and is a high beta stock. If the market has one more strong leg higher – as we forecast, Macquarie will be worth holding. Good business at a reasonable price and fits nicely with our overall market view.

2. Henderson Group (HGG)

The market has heavily discounted UK-based asset managers post BREXIT on fears that this move will create something more sinister throughout Europe and cause a GFC-style event – which we think is overblown, however, these fears will result in weakening fund flows which will clearly have an impact on HGG earnings for the remainder of 2016.

3. Origin Energy (ORG)

Origin Energy has been a bit of a struggle since we bought around $5.50 as a way of playing our positive view on Oil. ORG is geared to the gunwales, but if you believe the oil price will recover (which we do), ORG will de-gear quickly, and thus remains a BUY.

Summary

It is our belief, today's report from CBA, combined with the ANZ report earlier in the week, will be the catalyst to drive the market higher in the short-to-medium term and present increased investment opportunities. Market Matters would like to extend you a special offer, to take advantage of the complete Market Matters service, receive our ongoing market analysis and stock buying recommendations.