CBA share price to hit $65, says UBS ahead of full-year report

We examine how UBS analysts view the Commonwealth Bank of Australia heading into the bank’s full-year results.

Analysts remain Underweight CBA

With the Commonwealth Bank of Australia (CBA) set to report its full-year (FY20) results in two days, we unpack one key investment bank’s thoughts on the bank.

Overall, the sell-side has grown increasingly bearish on the biggest of the big four banks over the last month, with the consensus rating shifting from a Hold rating one month ago, to its current rating of Underweight, according to the Wall Street Journal.

On a more granular level, only 2 analysts have Buy ratings on CBA, against 5 Hold ratings, 1 Underweight Rating and 6 Sell ratings, also according to the Wall Street Journal.

Of those analysts, UBS sits somewhere in the middle, assigning Commonwealth a Neutral rating and price target of $65.00 per share – implying some downside from current price levels.

As with Citibank’s analysis of the sector, UBS analysts, in a recent note on the banks, have paid special attention to the Australian Prudential Regulation Authority’s (APRA) recent regulatory guidance around expectations concerning authorised deposit taking institutions (ADIs) and their capital management strategies.

Here it was noted that ADIs should ‘seek to retain at least half of their earnings when making decisions on capital distributions (and utilise dividend reinvestment plans and other initiatives to offset the diminution in capital from capital distributions where possible).’

ADIs are also expected to regularly conduct stress tests and continue to support Australian households and business through ongoing lending.

How this regulatory guidance may influence the banks has proven to be a divisive point among analysts, with Citi analysts expecting the biggest of the big four banks to pay a final dividend of 50 cents per share, bringing CBA’s total payout to 250 cents per share. By comparison, UBS expects Commonwealth to pay a final dividend of 95 cents per share – equating to a 50% payout, by the investment bank’s calculations. Though ahead of consensus, USB argues that a dividend of that magnitude is supported by the bank’s strong capital position and recent asset sales.

Even so, more broadly commenting on the sector and investor expectations, it was noted that:

‘We believe all shareholders must recognise that bank dividends are not an annuity, especially during the depths of a recession with 11% of mortgages and 17% of SME loans on deferral, and with 25% of the population returning to lockdown.’

CBA share price: Other bits and pieces to consider

Overall, UBS expects CBA to report core earnings of $13,394 million, against cash earnings per share (EPS) of 432 cents.

Elsewhere, investors will likely be eager to see updated figures on the bank’s loan deferrals – given the recent lockdowns in Melbourne, one of Australia’s key states – both in terms of economic activity and from a property market perspective.

Overall, of the approximately 240,000 loan deferral requests CBA reported in April – 25,000 were personal loans, 70,700 were business loans (of balances totalling $15.2 billion) and 144,000 were home loans (of balances totalling $50 billion).

Cautiously, UBS warned that ‘CBA could experience an uptick in impairment charges in FY21E as government stimulus and loan deferrals come to an end.’

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