What is your professional pick?
Commonwealth Bank Australia (CBA).
Market Cap $130 billion.
How long have you held the stock?
We have been a long-term holder of the stock.
What do you like about it?
CBA remains the strongest domestic bank benefitting from its strong capital base, dominant market position, low funding costs due to its strong deposit base and significant exposure to low capital intensity assets (residential mortgages) allowing it to generate the highest return on equity (ROE) of the domestic banks.
This also results in CBA having strong organic capital generation capabilities, allowing it to meet any future capital requirements more easily and continue to maintain its dividend.
CBA is trading on a 14 times forward price to earnings multiple and an 8% forward grossed up dividend yield.
How is it better than its competitors?
As stated above, CBA is the strongest domestic bank benefitting from its leading market share position across total lending and deposit markets only conceding market share in the corporate lending market.
This allows CBA to lead on pricing, as it operates in a disciplined oligopoly, and has access to the lowest cost of funding given its large proportion of low cost deposit accounts.
Despite recent changes by APRA to mortgage risk weights, CBA (and the majors) still has a capital advantage over standardised banks.
What do you like about its management?
CBA has a well-balanced senior management team that remains focused on its domestic business and maximising the returns of these assets through superior execution.
CBA has successfully invested in its technology systems, leading to continued productive gains and it remains well placed to defend future competitive threats.
What is your target price on CBA?
Around $81 in the next 12 months.
At what point would you sell it?
We will look to review our position if there were indicators that a bad and doubtful cycle was to materially trend upwards and any potential changes in regulatory capital requirements.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
CBA has outperformed the broader ASX 200 Accumulation benchmark by 1.2% over the past year.
Commonwealth Bank of Australia (CBA)
Source: Yahoo!7 Finance, 5 November 2015
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