Daily ShareChat: Commonwealth Bank of Australia

Thursday 19th August 2010

While Commonwealth Bank of Australia's annual result was in line with expectations, its bearish guidance could weigh on the stock for a while, says David Walker, an analyst at Aegis Equities Research.

The bank, which owns ASB Bank and Sovereign in New Zealand, reported a 20% rise in statutory net profit to A$5.66 billion (NZ$7.16 billion) for the year ended June with its second-half loan impairment expense halving but second-half net interest income falling 4% as intense competition in retail deposits crunched net interest margins.

"Although management is optimistic about the medium-term outlook, fragile business and consumer confidence reduced business momentum towards the end of the second half and guidance is for a soft first half 2011 with 'hopefully' a stronger second half," Walker says.

"Key swing factors will be the outlook for interest margins and the health of the economy. The latter will determine how fast bad debt expense normalises," he says.

On the positive side, the bank has taken large amounts of profitable market share, especially in residential mortgages, from foreign banks and from securitising non-banks which can't fund their loan books any longer, Walker says.

On the negative side, the cost of wholesale funding remains high and price competition for deposits and home loans is vigorous, he says.

Recommendation: Accumulate.

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