Top broker says forget CBA (ASX:CBA) and buy Westpac (ASX:WBC) shares

The Commonwealth Bank of Australia (ASX: CBA) share price was well and truly out of form last week.

Over the five days, the banking giant's shares lost 9.2% of their value and closed at $97.81.

Is the CBA share price in the buy zone?

Despite this sharp pullback, one leading broker believes the CBA share price could still fall a lot further from here.

According to a note out of Morgans, in response to the bank's first quarter update, its analysts have retained their reduce rating and cut their price target to a lowly $73.00.

Based on the current CBA share price, this implies potential downside of 26% for investors over the next 12 months.

What did the broker say?

Morgans wasn't impressed with the bank's update, noting that it fell well short of its expectations.

It commented: "Commonwealth Bank's 1Q22 unaudited cash NPAT is ~9% lower than our expectation largely due to the net interest margin (NIM) being significantly lower than our expectation, non-interest income softness and higher-than-expected operating expenses."

This result reinforces the broker's view that the CBA share price is trading at an unjustifiably large premium to its peers.

Morgans explained: "Our view is that CBA's stock has been trading on a significant premium relative to peers, and we believe this premium remains significant despite CBA's share price fall in the last trading session. In our view, the 1Q22 trading update emphasises that the current extent of the premium is unjustified."

Which bank should investors buy?

While Morgans acknowledges that Westpac Banking Corp (ASX: WBC) has also been hit with margin pressures, it thinks investors should be buying its shares ahead of CBA.

The broker has an add rating and $30.50 price target on Westpac's shares.

It commented: "While WBC has also experienced significant NIM contraction, our view is that WBC's stock has been far from being priced for perfection. We also believe that the NIM headwind from Australian home lending competition coming through for CBA is greater than that coming through for WBC."

"Furthermore, the cost outlook for WBC is more attractive than that for CBA in our view. For these reasons, we believe the extent of CBA's P/NTA premium over WBC – currently ~85% – is very difficult to justify, particularly bearing in mind that these two major banks have similar loan book compositions and a similar return on tangible equity (ROTE)," the broker concluded.