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The Sydney Morning Herald

CBA investors worry with Murray

Author: Anthony Hughes
Date: 30/11/2002
Words: 536
          Publication: Sydney Morning Herald
Section: Business
Page: 47
Perhaps it says something of David Murray's long and relatively unblemished track record that investors have so taken to heart that Commonwealth Bank's profit stutter early this month might finally signal the end of the banking bonanza.

After all, retail investors aren't used to bad profit news from the CBA boss's mouth.

In the past month, CBA shares have fallen 7.65 per cent or about $3 a share to yesterday's close of $27.15.

That's much more than the nearest big bank, National Australia, which is down 1.86 per cent over the same period.

Of financial stocks, only fund manager Perpetual has performed worse. But to put the fall into perspective, CBA's shares were not far north of these levels only one year ago.

One broking analyst said yesterday there was very little buying interest in the shares from institutional shareholders now.

Analysts interpreted the annual meeting forecast as foreshadowing less than 5 per cent growth in net profit, against double-digit growth in the past.

Most analysts now have Commonwealth Bank in fourth place when they rank the stocks of banks, which in turn are all facing their toughest profit outlook for some time.

Until recent months, CBA had traded on higher price earnings to its peers, reflecting the higher esteem in which the bank is held by investors.

There are various theories of why the premium has existed. They include the loyal retail investor base, high dividends and the bank's low-risk housing dominated lending book. But it's hard to go past the bank's consistently high return on equity and steadily rising profits and, until recent years, earnings per share.

Unfortunately with the purchase of Colonial in 2000 for $10 billion, the shine has gradually worn off as investors have also had to consider the success of the merger and the impact of poor equity markets on the wealth management business.

One dissenting analyst says the capital adequacy issues raised this week have been overblown. Mr Murray's assurance this week that there was no issue here akin to the British life insurers (see AMP's big capital raising) should be enough to convince the market. Given he is into his 11th year running the bank (though he's still in his early 50s) and has shown a longevity few could match, not many would be prepared to doubt his word.

At least three broking firms, including the highly rated JP Morgan team, have been leading the concerns about capital recently.

Another fear is that retail investors, the bedrock of the stock, will flee the stock on concern that the dividends will fall with the less than robust outlook.

But finance director Stuart Grimshaw has indicated that dividends will grow in line with cash earnings.

On some figures, CBA's forecast dividend yield is about 6 per cent (based on a probable 2003 dividend of around $1.60 a share).

This is higher than other banks, but also reflects that CBA has generally had a higher payout ratio than NAB, ANZ and Westpac.

This means there is less leeway to increase the dividend yield if the board wants to shore up market support.

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