CBA 0.44% $68.45 commonwealth bank of australia.

citigroup report of today

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    source: citigroup, DYOR please, thx...

    Flash: Commonwealth Bank of Australia (CBA.AX): Headwinds Building - Q1 Update

    § Still more downside in CBA - with earnings headwinds, relatively low provisioning and the capital question still hanging, risks still remain in CBA. We expect earnings to test the low end of consensus. Reiterate SELL.

    § Earnings pressure increasing - while the headline message appears very much business as usual, unfavorable trends in FUA balances and impairment costs are likely to represent a further earnings drag.

    § Management continues to underplay credit quality risks - the bank flagged full year impairment expense will be 40 - 50 bps (Citi 45 bps), "with the majority in the first half". This is after CBA delivered 26 bps in FY08 (and at the time management guided to 24 - 25 bps for FY09).

    § Wealth mgmt headwinds continue to build - average FUA fell 8% to end October versus 2H08. Management expects declining 1H09 profit for CFS and CFSGAM.

    § As expected tier 1 low versus peers - at 7.5%, with IRRBB deductions taking a bigger bite than for peers (and likely to require restructuring). This, combined with the earnings headwinds noted above, is likely to increase pressure for some form of raising at 1H09 (given peers now sit > 8% tier 1).

    § Funding task looks manageable - CBA confirmed its FY09 term funding requirement at $28bn (incl. Bankwest). While this is higher than peers, the bank is now 40% complete despite facing difficult conditions. Good growth in deposits being maintained may serve to temper the wholesale requirement.

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