Citigroup warns Commonwealth Bank of Australia’s (ASX: CBA) results could trigger sell-off

The recent rally in share prices of our banks is under threat from the August reporting season with Commonwealth Bank of Australia (ASX: CBA) scheduled to unveil its profit results next Wednesday.

A disappointing result from our biggest mortgage lender may be all it takes to undo the rebound in the sector, according to Citigroup.

Shares in Commonwealth Bank have jumped 7% in the last month-and-a-half compared to a 3% rise in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

It isn’t alone in its outperformance with just about every other bank stock like Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Bendigo and Adelaide Bank Ltd (ASX: BEN) outrunning the market.

Commonwealth Bank is seen as the bellwether of the sector and if the bank fails to meet expectations, it could give investors a reason to take profit on these stocks and run.

Citigroup thinks the bank will miss its mark with the broker’s forecasts about 4.5% below consensus estimates. There are a number of factors that could cause the miss.

The first is elevated funding costs for the banking sector following the blowout in the spread between the benchmark money market rates.

There is also increasing competition from smaller players and non-bank lenders and rising regulatory costs stemming from the Banking Royal Commission that will also weigh on its results.

I also think we will see margin pressure from Commonwealth Bank’s reluctance to lift mortgage rates. In fact, the bank has cut rates on some of its fixed-term loans to win back market share from smaller competitors.

The drop in credit growth to housing investors and the curtailment of interest only loans will add further pressure to its margins as these loans generate better returns for the bank.

These factors are also negatively impacting on the other three big banks but Commonwealth Bank is the only one of the four that is reporting its full year results this month.

Citigroup has a “sell” recommendation on Commonwealth Bank with a price target of $72 a share. It thinks investors should dump the stock now as the bank trades at a premium to its peers but its attempts to restructure and simplify the business makes it nearly indistinguishable to the other three banks.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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