Shares of Commonwealth Bank of Australia (ASX:CBA) have been upgraded by Macquarie recently. Macquarie believes CBA has the potential to grab more small and medium sized enterprise (SME) operations as the sector grows. Out of the four major Australian banks, Macquarie believes CBA will benefit the most from SME profits. “CBA appears to be taking share at the expense of ANZ and NAB” said Michael Wiblin, an analyst with Macquarie. CBA’s target price has been upgraded from $99 to $101 per share. SME profits are approximately $4.9m, but Macquarie expects this profit to expand to $6bn by 2018. Macquarie also expects CBA to take the largest piece of the SME pie, followed by Westpac. On the other hand, Macquarie downgraded NAB, citing a lower cash earnings forecast and “lack of momentum”.
This share upgrade opposes a very recent report from Goldman Sachs strategist Matthew Ross. Mr. Ross lowered the rating of all four major Australian banks from neutral to underweight. He cited the banking sector’s increased price to forward earnings ratio which has been 20 per cent higher than the past 20-year average. This evidence, combined with soft Australian economic data, increasing unemployment and a stunted resource sector, was cited as being a “flashing warning sign” to the “overstretched” valuation of Australian bank shares. Despite this downgrade, CBA announced that it increased its first half cash profit 8 per cent to $4.62bn and increased its fully franked interim dividend by 15c to $1.98. CBA is down 8c, or .1 per cent, at $90.57 about half way through the trading day today. But CBA is still trading near its all-time high of $93.96 that it reached just last month. One of the main challenges for CBA going forward will be to shrug off weak economic data. Most SMSF investors will probably not care whether CBA trades at $90 or $100 as the company will continue to offer a strong dividend yield, franking credits and - most likely - an overall stable share price.
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Author: Imran Valibhoy
Mar 11, 2015
Since Joining the firm in 2006, Imran has worked on a range of M&A and Capital Market transactions in the natural resources, mining as well as projects in the renewable energy sector. Prior to joining Wise-owl, Imran worked at Euroz Securities in Perth, aiding in the advisory and valuation of companies in the mining and industrial sectors in Australia. Imran has a Masters in Banking & Finance from City University's Class Business School in London and a Bacheloor degree in Commerce from UWA.