Commonwealth Bank: Huge profits, but priced to perfection

The nation’s largest bank, Commonwealth Bank (ASX: CBA) has announced a record cash profit of $7.8 billion, and raised its final dividend to $2 per share.

Despite the results coming at the top end of expectations, in early afternoon trading, the shares have fallen 1.6% to $73.33.

Quoted in The Age, IG Markets analyst Evan Lucas said CBA shares were “priced to perfection.” Given that, it’s not surprising the shares have fallen, although it didn’t stop ANZ (ASX: ANZ) and Westpac (ASX: WBC) shares jumping around 1% higher.

Earlier this week the widely read Lex column in the Financial Times said CBA’s valuation “can only be considered extreme for a bank with four-fifths of its loan book in its home market, where economic growth is slowing and government finances are worsening.” Colleague Joe Magyer calls Commonwealth Bank shares a time bomb.

Overseas hedge funds and commentators have long been predicting an Australian house price crash, and therefore pain for our big four banks. They’ve been wrong so far on the former, and with interest rates low and auction clearance rates going through the roof, property prices are moving up, not down.

Still, that’s no reason to pile into ASX banking shares. They’ve had a great run so far in 2013, with Commonwealth Bank shares up 18%. National Australia Bank (ASX: NAB) has lead the big four higher, up 25%. Buying the banks for yield has been a great strategy this year, but with slower growth ahead, the best is likely in the past.

If you’re already over-exposed to expensive bank stocks, check out “The Motley Fool’s Top Dividend Stock for 2013-2014.” In this special free report, find out the name, ASX symbol and full investment case for this top dividend paying stock. Click here now for instant free access.

Of the companies mentioned above, Bruce Jackson has a relatively small interest in ANZ, Commonwealth Bank and Westpac.

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