CBA 0.47% $86.72 commonwealth bank of australia.

banks on a fall, merrill cautions

  1. 636 Posts.
    Banks on a fall, Merrill cautions
    By Geoff Elliott
    July 25, 2003
    US investment house Merrill Lynch has slapped a "sell" recommendation on the Commonwealth Bank of Australia, adding to the growing weight of opinion that Australian bank shares, particularly CBA's, are set for a fall.

    At a time when speculation is mounting that the profit reporting season starting next week will bring a slew of negative news, Merrill's report says CBA may "fail to meet market expectations in the short term".

    The report was issued yesterday and may add to selling pressure on CBA shares, which Merrill says remains overvalued relative to other banks at a time when its ability to cut costs is limited.

    Several other investment houses have placed "underperform" recommendations on CBA shares in the last few months, but the bank's shares have remained resilient in the face of the negative calls on the stock.

    The Merrill report yesterday says that "with some risk of earnings disappointment in the shorter term horizon", CBA is "our least preferred major bank".

    While the report says the company is on the right track strategically, it labels the CBA's wealth management business "the most expensive company in the Merrill Lynch global universe of life companies".

    It says a recovery in CBA shares in recent weeks was due to the recovery in share markets and the bank's proxy on this recovery because of its fund management operations. However, Merrill says this proxy effect is unjustified.

    CBA suffered an outflow of funds during the second half of 2002 – a gross $827 million a week – and "the situation is unlikely to have improved in the second half", it says.

    Margins are under pressure and the lack of retail investor confidence means taking fund management operations as a proxy to rising share markets is not valid at this point in the cycle, Merrill adds.

    It also predicts a 20 per cent decline in revenue margins for CBA's retail funds management business over the next five years.

    The CBA's problems in its fund management business stem from its $8.5 billion acquisition of Colonial in March 2000.

    Like the other major banks which went on a fund management buying spree, CBA struck its deal at the top of the equity market cycle and has been paying the price ever since.

    The Merrill report stresses that CBA is probably the most efficient retail banking business of all the major banks, but says this means it has little room to carve out more costs relative to other banks.

    CBA shares fell 2c to $29.75 yesterday
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