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Here’s why Commonwealth Bank of Australia has crashed through $90


Investors have been given even more reason to buy shares in Australia’s big four banks with the Reserve Bank of Australia perhaps set to slash interest rates further when it meets on Tuesday. Indeed, as many as three are expected this year.

Each of the major banks have rallied higher over the last month as investors have piled into the seemingly “biggest” and highest yielding dividend stocks available. While National Australia Bank Ltd. (ASX: NAB) has led the charge – its shares are up 6.6% – Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have jumped 3.5% and 4.5% respectively.

Commonwealth Bank of Australia (ASX: CBA) has done one better. Its shares have risen approximately 4.9% over the last month and surged to a fresh all-time high today – cracking the $90 mark for the first time in history.

Despite their strong gains however, it remains a common belief amongst investors and analysts that the banks are overpriced. The Australian Financial Review quoted Nikko Asset Management Australia’s head of equities, Brad Potter, as saying: “Really they are expensive on virtually all measures… They are overearning quite substantially.”

Indeed, the profit growth hasn’t come from a growth in loans but rather low bad debt charges, driven down by record low interest rates.

Although they remain overpriced and their earnings growth could significantly slow in a competitive environment, the stocks could receive an additional level of support thanks to their compelling dividend yields. If the RBA cuts rates this year (there’s a strong likelihood that they will), investors will increasingly turn away from the safety offered by term deposits and cash to instead benefit from the bank’s potentially superior dividend returns.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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