The Commonwealth Bank of Australia (ASX: CBA) share price has long traded at a premium compared with the other ASX banks.
Whilst Commonwealth Bank, along with National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ), together form the cornerstone of the Australian banking industry, it has long been dominated by CBA.
This dominance translates across to the CBA share price. Today, CBA shares trade on a price-to-earnings (P/E) ratio of 10.75. If we look at the P/E ratios of NAB (9.13), Westpac (8.05) and ANZ (7.49) – we can see this premium quantified. Looking at other valuation metrics like book value, we see this premium reiterated.
But is it just the size of CommBank that enables it to command a premium price?
The secret sauce of Commonwealth Bank
The first thing to note with CommBank is its history. In my opinion, Commonwealth Bank is still benefitting today from the company's history as a government-owned company. Even though CBA underwent privatisation in the early 1990s (at $5.40 per share no less), legacies from its past still benefit the bank. These include the retaining of its existing customer base and the pre-privatisation absorption of several state banks.
At one point, Commonwealth Bank even acted as Australia's central bank before this role was taken over by the Reserve Bank of Australia (RBA).
But ever since the company went public, it has maintained an edge in the Australian banking sector. It has managed to maintain and even grow its market share across almost all financial services and consistently boasts a higher return on equity metric than its rivals (currently 11.97% for the past twelve months).
It was also the only big 4 ASX bank not to cut its dividend or franking levels last year (although this looks certain to change in 2020).
Are CBA shares a buy today?
Even though Commonwealth Bank has a lot going for it today compared with other ASX banks, the banking sector as a whole faces some significant headwinds.
The coronavirus shutdowns are damaging large parts of the Australian economy, which means that the banks are also in line to suffer. Loans and mortgages are how banks make money, and more people defaulting means less business coming through CBA's doors.
Interest rates at near-zero levels will also damage the banks' ability to earn profits going forward. And if we see deflation in the Australian economy (which RBA governor Philip Lowe flagged yesterday), it may prompt Australians to keep more cash in physical form instead of having it in a bank.
Foolish takeaway
I like Commonwealth Bank as a company, but I don't think there's much of a solid investment case to be made for CBA shares at the price they're currently trading for. There is a lot of uncertainty in the banking sector right now, and I would like to wait until some of this clears before making an investment.
CBA may deserve to trade at a premium to the other ASX banks, but this doesn't mean an investment is automatically justified.
