Save our banks, well, the CBA anyway

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One has to chuckle when seeing the warnings from Commonwealth Bank of Australia chief executive Ian Narev that the country’s big banks may not have enough money to lend if economic conditions improved, which is putting pressure on the government to hold an inquiry into the financial system. Nothing like a “national debate”, it seems. Or “legitimate questions to be asked about Australia’s future funding model, the role of banks and in fact the role of capital markets.”

Not too legitimate, one hopes. Just enough of an inquiry to allow the nation’s banks to get an even bigger leg up from implicit government sanction. After all, we wouldn’t want the prospect of a credit squeeze impeding anyone’s chances of re-election, would we?

Meanwhile, analysts aren’t all that positive on the stock. Merrill Lynch has an underperform and a $49 price objective:

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 “CBA’s $3.5bn 2H12 cash profit was in-line with expectations but we think the lack of top line growth will leave investors questioning the premium valuation. While the bank has conservative settings, a healthy balance sheet and asset quality was ok, the anaemic growth illustrated how hard banks are peddling against headwinds such as deposit margin pressure to deliver attractive results. A key plus was the higher dividend payout (75%) although we are not getting excited about capital returns on the back of the group’s new 9% ‘harmonised Basel II’ core tier 1 target.”

Deutsche has a hold and a higher price target of $56.50:

 “At a headline level the CBA 2H12 result did not appear to justify its premium with cash earnings falling by 1% and ROE reducing to 18.1%. However when you cut deeper into the numbers and adjust for asset repricing benefits, CVA and other market related impacts we believe that CBA’s real underlying 2H12 cash earnings growth was 6% and the ROE was 19.3% (3.9% above peers). With capital unlikely to impede this ROE going forward we believe that CBA looks fairly priced.”

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Goldman Sachs has a sell. It reckons it is a well run bank, but there are better returns elsewhere:

 “Given below peer capital levels (Basel III ARPA of 7.50% versus peers 7.74% to 7.80%) coupled with a lower dividend yield, we see greater capital returns elsewhere. Furthermore, while CBA has maintained a sector-leading ROE, growth outlook is at the lower end of peers.”

The dividend of 6.6% offers some protection on the downside, but the run up is probably over. It has outperformed the All Ords since May and the ASX 200 since February, but it seems likely to come back to the pack. Time for an enquiry, really.

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