Ian Narev's challenge; Where to for Commonwealth and the rally?

CBA is tipped to deliver a record. But a vision for growth and bigger dividend is required to maintain the momentum.

Ian Narev carries the weight of the expectations of an entire nation.

The head of Australia’s biggest company and the 10th largest bank in the world, Narev has driven the Commonwealth Bank (CBA) juggernaut to record stock price levels, aided in no small part by investor obsession with yield.

CBA tomorrow is tipped to report an unprecedented $7.6 billion full-year result, half a billion higher than last year and the latest in a now unbroken three-year run of record earnings.

It was the banks, and the Commonwealth in particular, that sparked a stockmarket rally that began almost a year ago.

By any measure, however, CBA now is expensive. Priced at 16 times earnings, it is far and away the most expensive bank in the Australian market which itself takes gold when it comes to inflated valuations.

As a consequence, its yield – the very factor that has driven the rally – now has become compressed, dropping below 5%. The pressure now is on Narev to either lift the dividend or, as is more likely, offer a special dividend if only to justify the recent run.

Since Christmas last year, analysts have scratched their heads, wondering just when the share price advance would grind to a halt. Top-line growth had been less than stellar as consumers and businesses concentrated on restoring balance sheets and reducing debt.

In the early phase, the earnings growth was driven by a drop in bad and doubtful debts and, more recently, cost-cutting and efficiency improvements.

But that may be about to change. The rate cuts may finally start to fire up the economy. A recovery in residential property has seen strong growth in lending for investment properties in recent months and the fall in the Australian dollar should boost corporate earnings in the year ahead, leading to greater confidence and the capacity to lift debt (see Adam Carr's The coming uplift in equities and property).

Narev will need to outline a vision for growth, rather than cuts, to maintain the momentum.

The major area to watch will be bad debt provisioning. Fears economic growth may cool as the mining investment declines have raised concerns that CBA may attempt to keep its bad debt charges at a minimum by releasing provisions.

Where BHP once drove stockmarket expectations and confidence, Narev’s delivery tomorrow will be the premier event in the earnings season calendar.

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