In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business. CBA – Current Price – $80.85 – The Commonwealth Bank has stood up and delivered what looks like a bumper profit result. It put a long list of regulatory and reputational problems behind and produced a $2.65bn cash profit which beat analyst expectations. The market welcomed the result sending shares up as much as 2.50%. Key points from the result: Unaudited statutory net profit of approximately $2.80bn in the quarter Unaudited cash earnings1 of approximately $2.65bn in the quarter, up 6% Operating income growth of 4% underpinned by volume growth and improved margins Sound credit quality, with Loan Impairment Expense of $198m in the quarter or 11 bpts of GLAA2 Further balance sheet strengthening, with deposit funding at 68% and the Liquidity Coverage Ratio at 131% CET1 (APRA) ratio at 10.1%, up 55 bpts since June 17 after allowing for the payment of the 2017 final dividend The result was driven by lower bad debts and an increase in lending rates. Operating income was up 45% and its Net Interest Margin was higher in the quarter driven by asset repricing and reduced liquid asset balances, partly offset by the impact of the banking levy, higher funding costs and competition. It expenses however did rise by 4% but it includes provisions for any future costs associated with regulatory actions and compliance programs. But costs that could be incurred as a result of the AUSTRAC proceedings have not been included. Broker View: Morgans (BUY $80.00) – The broker has downgraded the stock to Hold from Add. It has a rather bleak view of the stock going forward saying the results showed subdued loan growth. Capital stood at 10.1% at the end of the period. The broker is being cautious and believes CBA will cop a hefty fine post the AUSTRAC investigation. Unconventional View: We disagree with Morgans. Out of the four, we think CBA’s result was the clear standout. The result not only smashed expectations it was clean and simple. No radical changes or deeper issues were buried within. Cash earnings were a clear beat on consensus forecasts, NIM was up unlike some of the other majors and its balance sheet looks to have strengthened with a CET1 ratio of 10.8%. This is expected to go even higher once $3.8bn sale of its troubled life insurance business is included. This led Bell Potter to immediately upgrade their earnings forecasts by 1% on lower than expected bad debt charges. The broker even said CBA may return surplus capital to shareholders. Of-course there is an elephant in the room. The bank will face allegations of breaching anti-money laundering laws regarding to AUSTRAC transactions. Whilst 4% has been put aside for costs associated with regulatory actions and compliance programs it hasn’t put anything aside for the result of the AUSTRAC proceeding. But in all seriousness how much do you put aside? CBA says it’s near impossible to give an estimate for the cost of potential penalties that might result from the Federal Court proceedings brought against it by the regulator. CBA is the only bank that has been caught up in money laundering scandal but it’s not a court case that will resolved overnight. It will drag on for months maybe years. It involves 174 mini trials because of…

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