Analysts call out 'blissfully ignorant' CBA share price
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The news: Analysts have further cautioned the overvaluation of Commonwealth Bank as it has retaken the mantle of most valued company by market capitalisation from BHP.
The numbers: CBA’s market cap sat at $222.9 billion by 12:10pm AEST, at $133.2 a share. In comparison, BHP's share price was at $42.98 with a market cap of $218 billion.
According to Bell Potter's latest research on Australian equities, the ASX 200 banking index has sped ahead of the broader market with a 40% growth rate over the past year, compared to 16% growth in the market index.
Bell Potter analysts noted that Australian banks’ returns on equity (ROE) were overvalued compared to overseas banks. CBA represented the largest outlier as it traded at nearly three times its book value while offering only a 13% ROE. They compared CBA with JP Morgan, currently offering a 15% ROE while trading at only 1.7 times its book value.
They said the Australian banks’ current ROE, around the low-to-mid-teens, seemed insufficient to support price to book ratios which were also at its highest since 2017 when ROE was higher.
They noted that it was difficult to see a scenario where current valuations could be justified on modest earnings upgrades.
If current stock prices remained stable, the banking sector would have to achieve a 27% increase in earnings for it to return to its historical price to earnings ratio average that it had over the past decade. However, consensus is expecting flat earnings over the next two years.
E&P Capital analysts has valued CBA shares at $80 in contrast to its current trading price of $132.44. This presents a 39.6% downside on CBA’s shares.
The context: While E&P analysts did not expect anything untoward in the bank's upcoming result, it pointed to its lower dividend yield which was the only major bank below the cash rate. They saw business lending asset quality risks building on the horizon which posed a risk to the bank's dividend outlook and raised questions about whether it should continue to grow its small to medium enterprise loan book strongly.
They also said that while CBA had achieved solid performance, its share price was 'flying blissfully ignorant of risks'. They said its ROE had converged with peers despite its investment premium soaring above the sector.
However, banking analysts have been calling out the over-valuation of the sector for nearly a year and CBA for even longer, yet the stock support persists — increasingly from offshore investors.
Bell Potter analysts have called to underweight the banks, with the prediction of an imminent non-earnings correction to share prices in the sector due to overvaluation. They noted that Australian banks’ price to earnings ratio has climbed steeply in recent months, and attributed the market’s valuation to overestimation of earnings upsides. They also pointed to increased government scrutiny over recent months as a potential for earnings downsides.
CBA and BHP have duelled for top spot over the last few days after CBA overtook BHP last Friday, pushing the ASX to a record-high closing. While there is market consensus that the big banks are overvalued, only Regal Partners' Phil King has come out to say that he has sold CBA short.
However, big banks could be sitting on billions of dollars in excess capital that could be distributed back to shareholders which is one reason that could justify the rally.
While there is market consensus that the banks have an unsustainably high share prices, one reason that could justify the rally is that banks would
What they said: "In our view, the banks are too expensive at current levels. Our recommendation is an underweight to the banks," Bell Potter said.
The sources: E&P Capital research, Bell Potter research
