Commonwealth Bank (CBA)

CBA's result this week contained few surprises and we think the underlying franchise remains in good shape. The highlights were Revenue up 5%, mortgages up 2.7%, Institutional lending up 12%.  Costs up 4%, Cost to Income at 42%, Pre-Provision Profits up 6% and bad and doubtful debts is a touch higher while Impaired and troublesome loans are stable.

Another area which raised an eyebrow was CBA's rapid growth in Institutional lending. CBA indicated this related to its participation in a few large infrastructure & utilities transactions and despite competitive pressures these transactions cover its cost of capital.

CBA also believes "there is no such thing as a domestic institutional bank" and it is building global capabilities in its chosen segments of resources, infrastructure, transport and financials. We would raise questions about this strategy given few global Institutional banks cover their cost of capital in the current rate environment and it  further concentrates CBA into industries Australia is already heavily exposed to.

CBA is currently trading around $74 per share and our price target is $82 per share and they have forecast a dividend of 5.8% for 2016 and 5.9% 2017. Overall CBA is looking to be in good condition as such for most of us who hold the company I would continue to hold. It seems business as usual and overall a boring result however this is how we like these companies to be.

If you do not hold CBA then now is a good time to start to build a holding however be cautious as the market is volatile and the Banks make up a large part of our index as such any large movements in the index will affect the banking sector and make these companies volatile.