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Is the Commonwealth Bank of Australia (ASX:CBA) about to undertake a capital return?

The Commonwealth Bank of Australia (ASX: CBA) share price enjoyed its second day of gains following the release of its quarterly earnings update with a top broker suggesting that the bank is well placed to undertake a capital return.

CBA’s share price jumped 1.5% in late afternoon trade to $70.37 – making it the best performing big bank stock.

An upgrade by Credit Suisse is helping lift sentiment towards our biggest mortgage lender with the broker moving its recommendation on the stock to “outperform” from “neutral” as it lifted its earnings forecast on CBA by around 3% a year for FY19 to FY21 in light of the quarterly update.

But that isn’t the only thing that is exciting investors.

“We consider CBA to be the emerging cost and capital story of the sector,” said Credit Suisse who increased its price target on the stock by $3 to $78 a share.

“It appears to us that many of the regulatory and compliance headwinds have been or are being dealt with. We, therefore, expect a focus on cost reduction.”

The bank’s CET1 ratio stands at 11.2%, well ahead of the 10.5% benchmark imposed by our banking regulator.

As costs continue to fall, this should leave CBA with excess cash that it doesn’t need – particularly in this environment where all the banks are shedding assets and simplifying their businesses.

There’s no need for expansion capital and shareholders can only hope that there will be some form of capital return in the not too distant future.

Some of the things Credit Suisse liked in the quarterly include the 1% drop in operating expenses, the strong CET1 ratio and improving asset quality.

But some things it didn’t like include home lending growth that’s below system (implying a loss of market share) and a margin squeeze in the quarter, although the lift in mortgage interest rates on some of its products will help offset this pressure in the following periods.

CBA may be the best performing bank today but its peers are also enjoying good support with Westpac Banking Corp’s (ASX: WBC) share price increasing 1.4% to $27.57 and Australia and New Zealand Banking Group’s (ASX: ANZ) share price gaining a similar amount to $$26.82 at the time of writing.

Only the National Australia Bank Ltd. (ASX: NAB) share price is sliding back to just below breakeven as the stock went ex-div as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index added 0.5%.

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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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