Which Bank's The Best

Sun Herald

Sunday August 26, 2007

David Potts

The Commonwealth continues to reward its investors handsomely, writes David Potts.

ONE of the all-time best-performing shares would have to be the Commonwealth Bank.

It hasn't so much outstripped the All Ordinaries index over the years as hoisted it up. Or, more recently, pulled it down. In the market turmoil of late bank stocks were hard hit, presumably because they're part of the financial system supposedly on the brink of something not very pleasant.

But if anything the banks are the winners. Life just got harder for the non-bank competition and, in the flight to safety for investors, a bank deposit isn't going to look too bad at all. If the rate banks charge on loans rises faster than they pay on deposits, even better.

In any event it's the cheap deposit base that is the mainstay of the banks' profits.

Although the Commonwealth has just posted another record, with profit up 18per cent excluding one-offs, not to mention paying a $1.49-a-share fully-franked dividend, analysts are a bit antsy about the slowdown in housing loans, credit cards and deposits in the second half.

It would be a worry if that continued, except the second half of the second half - sorry, the June quarter - showed a slight improvement when you allow for seasonal factors.

This suggests there might be something in its much touted improved customer service and program of jazzing up its branches.

But the real highlight is its wealth management arm, mainly Colonial First State, which jumped 23per cent over the year. This accounts for a fifth of its profits.

With all that super to tap, which grows exponentially each year as older Australians pour more in for their retirement, it would be hard to put a foot wrong.

As long as housing continues to improve - which it will if the economy keeps on growing this fast and immigration remains at a record - the bank can expect another bumper year.

But if there's a slowdown, thanks to its sheer size the Commonwealth will be the first to bear the brunt of rising defaults.

There are also risks with its push into Asia, especially Indonesia.

By the way, you won't get the latest dividend if you weren't already a shareholder by August 20.

ADVANTAGES

* High dividend

* Rides boom in super

* Turmoil hits non banks

* Cost ratio falling

* Booming economy

DISADVANTAGES

Falling margins

* Higher P/E ratio than other banks

* Retail banking flat

* Asian expansion risk

* Credit jitters

VERDICT

Long term, a must-have stock, but you could always wait for the next sharemarket shake-out when it'll be cheaper.

© 2007 Sun Herald

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