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Will CBA continue to underperform its peers?

Nicki Bourlioufas  |  14 Sep 2016Text size  Decrease  Increase  |  

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While the Commonwealth Bank has underperformed the other big Australian banks over the past three months in a big way, there is nothing wrong with the underlying business.

 

Analysts are divided on the outlook for the big four banks and impending changes to capital requirements has been weighing on the sector, especially the nation's biggest financial institution, the Commonwealth Bank of Australia (ASX: CBA).

CBA has underperformed the other big banks over the past three months in a big way. While shares in Australian and New Zealand Banking Group (ASX: ANZ) are up around 5 per cent over the three months to 14 September, and National Australia Bank (ASX: NAB) has largely held steady, CBA shares are down around 8 per cent and recently hit a 52-week low of $69.22.

Westpac (ASX: WBC) too has struggled, though not as much as CBA, falling by around 7 per cent over the same period. The S&P/ASX 200 has by comparison fallen by around 2 per cent.

Over one year, the numbers are worse. While the benchmark share index is up slightly or around 2 per cent over the past 12 months, all the big banks are down, with the CBA easily leading share price losses at 18 per cent.

Westpac is close behind at 17 per cent, while ANZ and NAB are both down around 10 per cent.

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The big question is whether the nation's biggest bank will continue to underperform its peers. Some analysts think it could underperform over the short term, while others say it has been oversold.

According to David Ellis, Morningstar's head of Australian banking research, CBA has been oversold, suffering after several big brokers recently put a sell call on the stock.

"Some of the biggest brokerage houses have put a sell recommendation on CBA because it has traded at a premium compared to the other banks, and the media has written up those recommendations, so it's become a self-fulfilling prophecy and the stock has fallen," he said.

One of the most notable, Morgan Stanley, recently downgraded CBA to an equal-weight rating and reduced its price target on the bank from $72.50 to $68. The investment bank upgraded ANZ to an outperform rating with a $28.50 price target.

The downgrade to CBA grabbed some headlines. Yet, retail investors aren't swayed entirely. The stock has, for example, been the most bought stock on the CommSec retail broking website in recent days as its price fell.

Goldman Sachs has also reconsidered its position, after its analysts upgraded CBA in mid-September to a buy, saying the underperformance in the stock has gone too far.

A big factor weighing on the banks and the CBA in particular, as Australia's biggest bank, is the prospect of the Australian Prudential Regulation Authority (APRA) again increasing capital requirements on the banks, following the implementation of Basel IV capital requirements.

"The fears that the big banks might need to raise capital in one big capital raising, rather than progressively over three to four years, has weighed on the stock and is one of the reasons some brokers have put a sell call on the CBA," Ellis said.

"But there's nothing wrong with the underlying business of the CBA."

Ellis believes the stock is trading well under its fair value of around $85. Nor does he believe, as some analysts do, that rising bad debts will harm the business of the bank, being much more benign than they were, for example, during the global financial crisis.

"On our forecasts, the CBA has a fully franked dividend yield of 6.1 per cent on last month's closing price. So that's a pretty attractive dividend yield for one of the Australia's biggest and strongest companies, irrespective of what happens in the economy," Ellis said.

According to analysts' forecasts published on FT.com, the 13 analysts offering 12-month price targets for CBA as at 9 September 2016 had a median target of $77.40, with a high estimate of $85.00 and a low estimate of $58.77.

Five of those analysts had an underperform call on the stock and two had a sell call on it, up from four and one, respectively, one year ago.

Basel IV, due towards the end of this year, is expected to follow Basel III and impose on banks more stringent capital requirements so banks are better able to withstand financial shocks. The new global rules are expected to come into force in 2019.

KPMG estimates the series of measures being introduced as the finalisation of Basel III will raise capital requirements of international banks by 350 billion euros ($526 billion) or cut lending by as much as 7 trillion euros ($10.5 trillion).

Whatever the requirements turn out to be, APRA is expected to consult with the big banks again next year on these requirements.


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Nicki Bourlioufas is a Morningstar contributor.

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