Motley Fool Australia

Kick Off: Commonwealth Bank of Australia v Westpac Banking Corp

ASX world cup

After losing convincingly against Australia and New Zealand Banking Group (ASX: ANZ) in their first match of the Motley Fool’s ASX World Cup series, this is a must-win for Commonwealth Bank of Australia (ASX: CBA), who will take on Westpac Banking Corp (ASX: WBC). It’s sure to be a thrilling match as Australia’s two largest banks go head-to-head in a fiery clash.

Here’s how the pair line up

Commonwealth Bank

Westpac

Code

ASX:CBA

ASX:WBC

Recent Price

$81.24

$34.14

Market Capitalisation

$132.3 billion

$106.6 billion

Forecast Dividend Yield

4.8%

5.3%

Projected P/E ratio

15.2

14.0

Price-Book ratio

2.9

2.3

Price Earnings Growth (PEG) ratio

1.72

2.6

Commonwealth Bank

Commonwealth Bank has been an incredible performer for fans in recent years. Since September 2011, its shares have risen an astonishing 92%, compared to the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) 39% jump, and it has delivered mouth-watering dividends. Commonwealth Bank’s heavy exposure to Australia’s recovering housing market has been advantageous for the bank, whereby low interest rates have helped boost mortgage lending activity which has aided Australia’s largest bank to a period of record profitability.

Unfortunately, it was the bank’s sheer strength that stopped it from scoring a goal in today’s match. The shares have shouldered enormous expectations for some time now and have grown weary, trading on a P/E ratio of 15.2 and a Price-Book ratio of 2.9, not to mention a PEG ratio of 1.72. The bank will be kicking into the wind in the second half with struggling revenue growth, and an increasing level of local competition which makes its shares look far too expensive at today’s price.

Westpac Banking Corp

Like CBA, Westpac has had a strong lead-up to today’s match. Its shares are up 83% since September 2011 and have been climbing higher and higher in 2014 – possibly thanks to its 5.3% fully franked dividend yield! Further, controlling 23% of Australia’s mortgage market, Westpac has also benefited from the recovering housing sector.

While Westpac’s strong defensive line (it boasts an APRA Basel III Common Equity Tier 1 ratio of 8.82%) managed to stop CBA from scoring today, Westpac also ended goalless for the day. Their P/E ratio of 14 is well above their 10-year average and they trade on a PEG ratio of 2.6. While they are expected to grow earnings at just 8.3% this year and then less than 5% over the next two years, the $34.14 price tag is still far too high.

Full time

Both teams failed to score today in a 0-0 result. While fans will likely forgive their beloved banks for their performances, we certainly saw weaknesses in both outfits. Investors would be wise putting their money on other companies with a much better chance of making it to the end of this tournament.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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