CBA – now under sell conditions
We draw your attention to the lower high formation now in place across CBA, NAB, ANZ, WBC, BOQ, BEN and Suncorp.
The lower high patterns are also in place on most of the major global banks as well.
CBA Announces Lower Cash Profit
Shares of CBA have traded in a wide range in early trade today as investors react to the mixed full year result for the bank.
The bank announced a cash profit of $6.2 billion, which is a 5% drop from the previous year and largely attributed to the $700 million fine paid to AUSTRAC and other regulatory expenses.
CBA will pay a final dividend of $2.31 taking the full year payout to $4.31 per share.
It’s too early to tell if the drop in profit is due to “one-off” charges, or if the bank’s profit cycle has peaked. We remain cautious of the banking names and will revisit the sector’s valuation over the near term.
CBA
Banks Brace For Round 5 Of The Royal Commission
The Big four banks will be in the spotlight this week as the Banking Royal Commission commences round five today in Sydney.
The main topic for this round of examination will be the fees, charges and weak performance of bank-managed superannuation funds.
One Melbourne-based think tank has estimated that excessive fees and poor performance can cost superannuation investors up to $12 billion per year.
Australia’s largest superannuation provider, AMP, felt the wrath of the Royal commission during the last round of testimony, which saw their share price drop over 30% and the sacking of its chairman, CEO and three other directors.
The chart below illustrates the performance of AMP’s share price relative to the other Big 4 banks.
We don’t have ALGO buy signals for any of the domestic banks and we’re not holding any banking names in our ASX Top 100 portfolio. However, we will look for signals as the share prices approach the June lows.
CBA Continues To Slide In Front Of FY18 Earnings Report
Our ALGO engine triggered a sell signal for Commonwealth Bank on July 9th at $76.10.
Since then the stock has lost over 3% and reached $73.50 in early trade today.
CBA is scheduled to report its FY18 result next Wednesday. The early forecast is for NPAT to print at $9.5 billion and DPS to be flat near $2.30.
There are three key reasons why we believe the earnings risk is skewed to the downside in this report.
The AUSTRAC settlement of $327 million, margin pressure from short-term funding costs and a disappointing 4% loan growth in June.
Technically, the CBA chart has followed a “lower high” pattern since since mid-January and has dropped over 10% during that time.
We continue to hold a bearish bias toward the banks, in general, and expect CBA to test the June low trade of $67.50 over the medium-term.
CBA
Sell Signal In Bank Shares
All four major banks, and the regional names, are now displaying Algo Engine sell signals. Currently we have no bank long holdings within our model portfolio.
Within the financial sector our preference remains for ASX and IAG. Both offer a fully franked dividend yield, and when combined with a covered call, we’re generating 10 – 12% annualized cash flow.
Our concern about the low ROE for the domestic banks is driven by weak housing loan growth and the rising cost of funds. These conditions keep us cautious on the banks, especially when combined with the present group of ALGO sell signals.
ALGO Sell Signal For Commonwealth Bank
Our ALGO engine triggered a sell signal on CBA into yesterday’s ASX close at $75.65.
The “lower high” pattern in the stock is referenced to the high posted at $77.50 on March 12th.
Subsequently, CBA has been removed from our ASX Model portfolio after being held for 148 days with a net gain of 1.52%.
Recent reports from both Citi and Morgan Stanley show the brokers have retained their sell ratings on CBA following its decision to demerge its wealth management operations.
Citi now has a downside target of $72.00 and Morgan Stanley is expecting the stock to drop over 15% to $64.00 over the next 12 months.
With this signal on Friday, our ALGO engine is now showing sell signals for all of the domestic banking names with the exception of MQG.
CBA
Increased Funding Costs Limit Upside For Local Banks
The domestic banks have rebounded significantly over the last two weeks with ANZ and CBA both rising over 10% from their lows in early June.
However, this optimism may be short lived as some of the world’s most “Systemically Important Financial Institutions” (SIFI Index) have been trading sharply lower over the last three months.
This banking index includes JP Morgan, Barclay’s and Commerzbank; banks that provide funding to domestic banks in Australia.
Aussie banks are heavily depended on USD-funding from these banks (and others) and will likely feel the pinch on earnings as US rates trend higher and USD liquidity becomes more expensive.
We have been cautious of the local banks and suggest investors look to use this recent rally to off-load long exposure in the banking sector.
SIFI Index
CBA
ANZ
CBA Settles With AUSTRAC For $700 Million
Shares of CBA have opened over 2% higher to reach $70.35 in early trade.
Before the open, CBA announced that the bank had settled on the alleged money laundering charges for $700 million.
This amount is not quite twice the $375 million amount the bank earmarked for the potential penalty, but well below some of the early estimates which were over the $1 billion mark.
And while settling these allegations is a positive result for CBA, we still believe the share price has more downside risk than upside potential.
Our ALGO engine triggered a sell signal for CBA at $80.32 in November last year. We see the next significant support level near $68.50.
CBA
CBA – 3Q18 Top and Bottom line miss
CBA provided a 3Q18 trading update and the result was soft and reflected declining bad debt charges are no longer offsetting softer revenues and higher operating expenses.
Historically, CBA traded on an average 11% premium to the other banks and we’re now seeing that narrow down to 4%.
CBA
Bank Royal Commission Update
Local banking stocks have found a slight bid in early trade today. However, we expect more downside price pressure as the Bank Royal Commission proceeds.
So far, we’ve seen evidence of appalling behaviour by Australia’s major banks and financial planners from the past decade, including bribes, forged documents and repeated conflict of interest in insurance products.
It seems that the banks discovered long ago it was highly profitable to sell their customers financial advice and financial products.
If they could charge customers for financial advice, and if that “advice” consisted of purchasing their financial products, then they would enjoy a profitable feedback loop.
This model was called ‘vertical integration”, which is inherently a conflict of interest.
With earning season approaching, we believe there will be some buying interest from longer-term investors.
We will keep a close watch on banking shares and advise which names have met our ALGO price criteria to hold in investor portfolios.
CBA
Westpac
NAB
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