If you have Commonwealth Bank of Australia (ASX: CBA) shares in your portfolio, then you may want to read on.
That's because one leading broker is warning investors that Australia's largest bank's shares are materially overvalued at current levels.
What is being said about CBA shares?
According to a note out of Goldman Sachs, its analysts believe the bank's shares are trading at an unjustifiable premium to the global banking sector average. Particularly given its weak outlook due to elevated mortgage competition and inflationary pressures. It explains:
We reiterate our Sell on CBA because: i) CBA's skew to consumer banking leaves it more exposed to elevated mortgage competition and our forecast slowdown in mortgage volumes, ii) despite a solid 3Q performance, we don't see CBA as immune from inflationary pressures, and iii) we estimate that CBA is currently trading at a 120% premium against where we estimate its forecast ROE justifies it trading at in light of global comparable peers' current price-to-book vs. ROE (48% historic average premium; 100th percentile versus history).
It is for this reason that Goldman has a sell rating and $84.97 price target on CBA shares. This implies potential downside of 14% from current levels.
'Uncharted valuation territory'
As mentioned above, Goldman highlights that CBA shares are in "uncharted valuation territory" when it comes to its return on equity (ROE) to price to book ratio. Goldman dives deeper into it, explaining:
An alternative way to consider the discrepancy between the relative deterioration in Australian bank profitability against valuations is to consider, on a monthly basis back through time, how the four major banks have traded versus the line-of-best-fit formed by their global comparable peers using consensus ROE and price-to-book ratio. For example, using the current ROE vs. price-to-book relationship for global comparable peers, we come up with a line-of-best-fit, which implies that for CBA's expected 1-year forward ROE of 13.0%, the stock should trade on a price-to-book multiple of 1.0x. However, the stock actually trades on 2.2x, which is a 120% valuation premium to this implied valuation.
Doing this same analysis back through time, […] it shows that CBA historically has traded at a 48% premium to where its ROE forecast implies it should trade at. However, given the stock is currently trading at a 120% premium to where current ROE forecasts imply it should trade, we are in uncharted valuation territory (i.e. 100th percentile versus history).
