Being the best performing ASX big bank stock isn't always a good thing. The Commonwealth Bank of Australia (ASX:CBA) share price has gone gangbusters in recent months but Morgan Stanley is telling investors to use the rally to sell the stock.
The CBA share price surged 9% over the past three months with the Australia and New Zealand Banking Group (ASX: ANZ) share price a distant second as it chalked up a 2% gain.
In contrast, the Westpac Banking Corp (ASX: WBC) share price and National Australia Banking Ltd. (ASX: NAB) share price have both lost around 2% of their value each over the same time frame as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is struggling to stay at breakeven.
Why the CBA share price is outperforming
There could be a few reasons for this. Bargain hunters may be attracted to the beaten down share price, its decision to divest its funds management business and relatively strong balance sheet for our largest domestic bank while others may have been encouraged to pounce after the bank posted a reasonably good profit result.
Morgan Stanley also highlighted its simplification strategy, its above peer housing loan growth, back-book repricing benefits and the Reserve Bank of New Zealand (RBNZ) capital proposal as some of the other reasons for the stock's outperformance.
"Despite this, we stay UW [underweight] given pressure on retail bank profitability, a deteriorating outlook for housing, an ongoing reinvestment and compliance burden, an emerging earnings hole from asset sales, limited margin for error on loan losses, and full absolute and relative trading multiples," said Morgan Stanley.
Capital return surprise in 2019
However, the broker acknowledges that CBA has the potential to excite investors with a share buyback and special dividend in 2019.
This is because CBA is expected to have more cash than it requires after the sale of its Colonial First State Global Asset Management (CFSGAM) division.
"We forecast the CET1 ratio to increase to ~11.7% once announced asset sales are completed. This means CBA will have excess capital of ~A$3.4bn above a conservative CET1 ratio of 11%," said the broker.
"We think it can undertake an ~A$3.5bn buyback during FY20E, although we highlight the alternative option of an ~A$1.5bn or A$0.85 per share fully franked special dividend before the end of June 2019 with a smaller A$2.0bn buyback next year."
Not all good news
But don't be surprised if CBA decides to keep a good chunk of its spare change too, warned Morgan Stanley.
Given the uncertain operating environment with house prices tipped to fall further this year and pressure from regulators for banks to hold a bigger capital buffer, CBA might opt for a more conservative approach.
Morgan Stanley has a $64.50 price target on Commonwealth Bank.
