Cba's Champagne Dividend Goes Flat

Sydney Morning Herald

Friday August 13, 2004

Duncan Hughes

Commonwealth Bank's champagne dividend may have distracted investor attention from the prospect of some flat earnings, according to analysts' critical reviews of the nation's largest mortgage lender's full-year results.

Its share price soared in the hours following Wednesday's results because of a record dividend but by the end of trading had tapered off and yesterday was down 13c to $31.91 as investment banks revised earnings forecasts.

UBS downgraded the stock from "buy" to "neutral" amid concerns about the falling contribution of cost cuts to earnings and the unlikely prospect of the bank repeating its recent performance in a weakening mortgage and investment market.

UBS analyst Jeff Emmanuel said margin pressure would increase, placing interest margins at risk.

Credit Suisse First Boston downgraded its 2005-06 cash earnings-per-share estimates for CBA by 2 per cent and 3 per cent respectively.

Goldman Sachs JBWere downgraded its short-term recommendation from "out-perform" to "market perform" because of the bank's minimal earnings upgrades, the absence of positive news, more pressure on margins than expected and the possibility of investors shifting from the underperforming banking sector.

However, Goldmans analyst James Freeman said the change in recommendation was "certainly not signalling the upside in the long-term story has come to an end for CBA".

Citigroup said that not even the good dividend could disguise the bank's "lacklustre" result, with the next year likely to get harder because of the "Which new Bank" overhaul at branch level, emerging competitive pressures and a slowing credit environment.

It has downgraded the stock from "buy" to "hold", having reduced its 2005-06 earnings estimates by 1 per cent and 2.5 per cent respectively because of concerns about margins and fee growth.

"We have rightly grown suspicious about the merits of 'transformational' programs with promised delivery of significant benefits to shareholders," the report said.

ABN Amro also has concerns about the "Which new Bank" program, warning that margin pressure appears to have intensified, emphasising the need for it to deliver. The investment bank retains its "hold" recommendation because it still has concerns about what will drive earnings.

© 2004 Sydney Morning Herald

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