Don’t Chase CBA

This story features COMMONWEALTH BANK OF AUSTRALIA. For more info SHARE ANALYSIS: CBA

Bottom Line 20/07/17

Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support levels: $77.65 – $76.29 / $69.22
Resistance levels: $87.74 / $96.16 / $105.00

Technical Discussion

Commonwealth Bank ((CBA)) is Australia’s leading provider of integrated financial services including retail banking, premium banking, business banking, institutional banking, funds management, superannuation, insurance, investment and sharebroking products and services. The Group is one of the largest listed companies on the Australian Securities Exchange. It provides a full range of retail banking services including home loans, credit cards, personal loans, transaction accounts, and demand and term deposits through its Commonwealth Bank and Bankwest brands. The Group has leading domestic market shares in home loans, personal loans, retail deposits and discount stockbroking, and is one of Australia's largest credit card issuers. For the six months ending the 31st of December 2016 interest income decreased 1% to A$16.67B. Net interest income after loan loss provision increased 4% to A$8.14B. Net income applicable to shareholders increased 7% to A$4.9B. Net interest income after loan loss provision reflects the retail banking services section increase of 6% to A$4.23B.  Broker/Analyst consensus is a comprehensive “Sell”.  The dividend yield is currently 5.1%.
 
Reasons to be cautiously optimistic:
→ Yesterday’s announcement by APRA was less severe than originally anticipated.
→ Major banks should be able to offset the negative impact from the government levy by around 50%.
→ Regulatory fears eased.
→ Sold Visa shares which should improve capital ratios.
→ Trading at around an 8% premium to its peers with 14% being the average.
→ The recent update showed reduced bad debt and stronger market trading profits.
→ Improved discipline on mortgage pricing is required.
→ Healthy dividend around 5%.

The banks got a big boost yesterday when APRA finalised its capital requirements which were better than both the banks and the market expected. Whether this can trigger a more significant rally is a big question although our stance remains firm. There is still upside potential within a bounce although we still can’t get overly confident that this latest move higher is the start of a multi-month trend higher. As we’ve mentioned in recent reviews of the banks and the XXJ, it’s the speed of the retracement off the April 28th high that is holding us back. A corrective pattern should not unfold as a straight leg movement, especially at this stage of the trend.

As such, we still must be sceptical regarding the recent rally. In fact, a push back up toward the recent pivot high at $87.74 is about the best we can expect although this would then open the door to see another decent leg down toward the early June lows circa $77.65. This would complete a much more symmetrical corrective pattern and set the stage for the next leg higher within wave-(iii). Taking a step back and looking at the weekly chart reminds us that Commonwealth Bank is the only one of the big four that can still produce a longer term 5-wave movement higher off the 2009 lows. However, having broken through the boundary of a large ascending triangle late last year, it’s essential that impulsive price action remains the main theme. That said, this is still more than feasible even if price heads up to the April highs and then rejects – which is still our expectation.

Trading Strategy

We still believe it’s best to remain sidelined and out of the banks. We certainly don’t want to be chasing price higher on the back of the APRA announcement yesterday. It’s obviously had a positive effect but it doesn’t automatically mean that lower prices aren’t around the corner. There are better trending companies out there at the moment with some of the small to mid-tier stocks breaking higher and getting on with the job. We’ll continue to concentrate on those.
 

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