Why this top broker thinks CBA (ASX:CBA) shares are the least attractive of all the ASX banks

This top broker doesn’t find the major bank as attractive as the others right now.

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Shares in banking giant Commonwealth Bank of Australia (ASX: CBA) are inching higher in afternoon trade and now fetch $93.36 apiece.

CBA shares fell off the cliff-face in an almost vertical fashion during November, coming off a high of $110.13 mid-month. Prices have yet to recover and are now trading at 3-month lows.

Analysts at JP Morgan aren’t so rosy on CBA shares at the moment and have continued to give an underweight rating with a downside price target in situ. Here are the key takeouts from a note released to clients.

CBA is unattractive right now

That’s what JP Morgan thinks anyway, when it recently assigned an underweight rating and a $90 price target on CBA shares. At the time of writing, this implies a downside potential of more than 3%.

The broker notes that CBA suffered extensive net interest margin (NIM) pressures last quarter alongside fellow banking giant Westpac Banking Corp (ASX: WBC).

It sees this trend continuing over the coming years, most pronounced in CBA amongst ASX banking majors as it has the most exposure to retail banking. The firm also highlights that only CBA “faces a meaningful drag on NIM from its [equity] hedge book in FY22”.

Aside from this, JP Morgan views “ongoing cost investment will likely cap pre-provision profit growth to similar levels to the other majors”.

Perhaps what is keeping JP Morgan on the sidelines most at present, is CBA’s valuation. It is trading on multiples that are currently unjustifiable from what the broker thinks.

Whilst JP Morgan acknowledges that the bank’s return on equity (ROE) has been high these past few years, it notes that the gap is closing from underneath with competitors.

It notes that “CBA continues to trade at a large premium to peers, despite falling 8% on the day of its 1Q22 update. It is currently trading on 19x (12 month forward earnings), which represents a 39% premium to peers”.

This premium increases to 48% based on JP Morgan’s internal forecasts on CBA’s FY23 earnings. The broker wasn’t impressed with CBA’s quarterly expenditures either, saying they were “again disappointing, further compounding revenue weakness”.

As such, it reckons the bank’s high ROE is “more than priced in at current levels, and sees better risk/reward in [National Australia Bank Ltd. (ASX: NAB)] NAB”.

JP Morgan concludes by suggesting that it has a preference for the other majors right now over CBA, making several explicit comparisons to NAB’s investment case.

CBA share price snapshot

The CBA share price has had its ups and downs this past year, having posted a return of more than 16% in the past 12 months.

This year to date, it has climbed almost 14% to its current levels but has slipped almost 11% from atop its previous high. It is also more than 3% down for the week.

The author has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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