Why 2 top brokers have ‘sell’ recommendations on CBA shares

You really have to feel for the big four banks at this point. Low interest rates are wreaking havoc on their margins and the multi-billion dollar impact of the Royal Commission persists.

Brokers aren’t playing ball either: Citibank and UBS both maintained their sell recommendations on CBA following the release of the bank’s Q1 results yesterday.

The real story of the Commonwealth Bank

As we discussed yesterday, CBA posted mostly good first quarter results: cash profits were up, and lending volumes rose across the board.

Yet it was probably an article from the Australian Financial Review (AFR) that summed up potential issues for the bank most aptly. Here the headline read:

‘CBA profit jump hides bank treading tough waters.’

Of course, no one is really pretending that the banks aren’t doing it tough, Matt Comyn himself noted the 'challenging operating environment, characterised by global macro-economic uncertainty and historically low interest rates.'

CBA share price: the analyst view

With the above considered, its unsurprising that a number of brokers remain bearish and investors uncertain on CBA’s prospects, with the bank’s share price falling 1.97% by the end of today's session.

Citibank reiterated their sell recommendation and put a 12-month share price target of $72.50 on CBA.

Centrally, Citibank pointed out that it expected the bank’s net interest margin (NIM) to be broadly flat in the second quarter of FY20, even though margins were stronger in the quarter just passed.

Interestingly, one key area where Citibank’s analysis differs from UBS’s is in the reading of the bank's capital position. Here, Citi described CBA’s capital position as ‘soft’ and noted that the big four's exposure to risk weighted assets rose quicker than previously anticipated.

As an additional point, and with the Reserve Bank of New Zealand’s decision on capital requirements still pending, CBA’s lending momentum picking up and with the bank launching a 'revised transaction path' for the sale of its life insurance business, Citibank now expects a delay in buybacks. This in turn, will put pressure on CBA’s current valuation premium in relation to the other big four, thinks the investment bank.

UBS took a comparably bearish view mind you, also reiterating their sell recommendation and putting a slightly lower share price target on CBA than Citibank of $70.00 per share.

While UBS was impressed that CBA's net interest margin had improved and that the bank's cash profits (NPAT) rose; it also noted that caution should be taken by investors, pointing out that Q1 is typically seasonally strong for the Commonwealth Bank of Australia.

Yet all of this seems very-much a case of delaying the inevitable: specifically, UBS pointed out that one of the core reasons that CBA's NIM did rise was due to the 3 week delay the bank took in passing on the RBA rate cut to its variable rate mortgage customers.

In line with this, the investment bank expects CBA's NIM to decline in the second quarter (just like Citibank), as the impact of lower rates becomes more apparent.

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