CBA has a rock star share price, but it’s hard to find groupies

There’s a new game in town, called Commonwealth Bank share price Twister. It involves expert banking analysts stretching themselves into ever more uncomfortable contortions to explain why the bank’s share price is on a tear.

Just how a solid, cyclical bank’s shares are behaving like they belong to rock star company with massive blue-sky growth is, as one analyst described it this week, a head scratcher.

Where is CBA CEO Matt Comyn’s guitar?
Where is CBA CEO Matt Comyn’s guitar? Credit: Dominic Lorrimer

This is no Microsoft being rewarded for its first mover advantage in generative AI.

But CBA and Microsoft shares have both risen by 18 per cent over the past three months.

Microsoft just reported a 33 per cent lift in earnings, but only in his dreams would CBA chief executive Matt Comyn deliver this kind of growth.

CBA will be reporting its first half-year result next week, and it is universally expected to be softer than the previous corresponding half, and the consensus for our banks more generally is for flat earnings in 2025.

Comyn has an impossibly high bar to clear if the price is to be justified on earnings fundamentals.

And brokers have for the most part responded to the surge in CBA shares by placing a sell on them – a call which has been largely ignored by investors.

Thus, Comyn has an impossibly high bar to clear if the price is to be justified on earnings fundamentals.

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He is not the only one under pressure. The analysts who have placed a sell on CBA due to its out-of-whack fundamental value will be feeling the heat from the bank’s high share price, and some could eventually cave and change their recommendation to neutral or even buy. Doing so would risk them catching a falling knife.

Citi’s Brendan Sproules admits that analysts have historically been “horrific” at predicting the CBA share price, and the past six months, he says, have been no different.

At CBA’s current price of 2.6 times its book value, it is trading at a 100 per cent premium to its major bank peers. Pre-COVID, this used to be what Sproules describes as a “mild” 40 per cent premium.

It even now has a dividend yield that is skinnier than the risk-free rate (or the 10-year government bond rate). Sproules posits that “some might think there is less credit risk with Matt Comyn than Jim Chalmers”. One guarantees your capital, and it isn’t Comyn.

UBS attacks the decoupling of share prices of banks from their fundamentals in a different, and perhaps novel way.

It notes the recent strength in bank shares reflects the newfound optimism around softer inflation, interest rate cuts and a benign credit cycle.

But it introduces a new factor to explain CBA’s runaway share price: what investors are willing to pay for market share.

UBS compares the Commonwealth Bank to US bank JP Morgan. “Both banks, on this metric, market capitalisation to/total system assets, are at about 70 per cent premium to peers, implying CBA’s valuation might not be as stretched as the market perceives.”

This also requires UBS to detach the CBA valuation from the traditional measures such as return on equity and discounted cash flow.

Sproules, however, says CBA is close to one of the most expensive banks in the world and is expensive even by its own lofty standards.

The valuation could be better justified next week if the bank delivers expected softer earnings but a better dividend.

Contortions aside, CBA appears to be the happy recipient of its size – or its sizable weighting in the Australian index.

Its large index weighting draws passive buying. According to Citi, For every $10 flowing to passive products, nearly $1 by default goes to CBA. This then becomes self-fulfilling.

To be fair, CBA is a very strong and well-run franchise whose ownership is strongly populated by retail investors.

But with pressure on its net interest margins, and without strong credit growth, its current share price strength is hard to fathom.

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Source: Thanks smh.com