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Commonwealth Bank sees flood of broker downgrades

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It’s been a rough couple of weeks for CBA, with shares suffering their worst single-day sell-off since March 2020. The sell-off was due to investors dumping the big bank following what was seen as a disappointing  squeeze on profits caused by the record low cash rate and fierce home loan competition.

CBA says its net interest margin was “considerably lower” over the September quarter, as it deals with headwinds such as low-yielding cash and bonds, sharp home loan pricing and a higher proportion of low fixed-rate loans on its books.

The bank has warned of fierce competition evident in the home loan market, which eventually hurt CBA’s margins. This triggered a selloff in a stock that was already well overpriced and trading on a lofty valuation. Cash profit rose 22 per cent to $2.2 billion, in the September quarter.

On a positive note, CBA acquired a minority stake in one of the world’s largest regulated crypto exchanges and custodians, Gemini, through the platform’s first capital raising. The purchase will soon see CBA customers able to transact in cryptocurrencies such as Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH), among other cryptocurrencies, through its platform. CBA bought into the platform through Gemini’s recent US$400 million ($555.6 million) equity raise. The capital raise valued Gemini at a whopping US$7.1 billion ($9.9 billion).

The Gemini platform is one of the most popular crypto exchanges that also allows its users to create non-fungible tokens (NFTs). 

Brokers across the board have downgraded their target prices and recommendations on CBA in the wake of the quarterly update.

  • Morgans has a “reduce” recommendation with a target price of $73.00. Morgans says the cash profit was a 9% miss, in its view, with a significantly lower-than-expected net interest margin (NIM). The broker still feels the stock trades at an unjustified premium relative to peers. Target price falls to $73 from $80.
  • Macquarie has an “underperform” recommendation with a target price of $86.00. The broker notes the sell-off was due to competition-driven mortgage margin erosion; and a decline in non-interest income. EPS forecasts are downgraded by 2% to 3%, to reflect growing expenses and margin pressure. Target price falls to $86 a share from $88.50.
  • Citi has a “sell” recommendation with a target price of $94.50. The broker was disappointed with the report and NIM fall, on top of rising costs, against a background of no growth in revenues. Looking forward, it sees no justification for CBA to trade at a premium.

On one broker calculation, CBA was trading at an 85% premium over Westpac Bank (WBC), even with a weaker home lending unit and cost outlook.

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