CBA delivers the goods, but is a reversal due?

CBA shares hit a new record high today of $78.40 on the back of the solid Q1 trading update. 

Whether today’s highs are significant is yet to be seen, with some traders suggesting we could see price take a turn for the worse for CBA, despite the good result. Price action needs to be the guide and right now there aren’t any glaring signs of a reversal, although the new all-time high on the daily chart hasn’t been replicated by a higher high on the RSI’s and a subsequent fall in the share price would create divergence here – a classic sign that a reversal could be due.

In terms of the Q1 numbers, the cash earnings of A$2.1 billion was strong, and feeds into the idea that its 1H14 earnings are around 4% of the markets estimates. This was primarily driven by lower bad and doubtful debts, which are running significantly below expectations. The pre-provisioning operating profit was around 1% ahead of expectations and many analysts will look at this to survey the underlying quality of the result.

Net interest margins are running “marginally lower” in the half, which fits with what we have seen from the other banks to report, and it’s worth highlighting that most analysts were expecting a slight fall in margins in 1H14 anyhow and it will be interesting to see if the bank has picked up market share in the home loan market. The bank also reported strong trading income.

I doubt this will cause analysts to re-rate the stock and at best it could see modest future EPS adjustments, which would put a small increase to the consensus twelve month price target (which currently stands at A$71.74).

From a pure fundamental basis the stock is fully valued, however we need to see price confirm a reversal and then we could see a spike in short-sellers. Chasing the stock at these levels could be tough as I feel the upside is limited, however, shorting banks has been painful and I need price action to confirm a reversal is due.

CBA share price

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CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.