Broker warns that CBA shares could fall 20% amid unjustified valuation premium

This banking giant's shares could be overvalued at current levels.

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Commonwealth Bank of Australia (ASX: CBA) shares are underperforming on Wednesday.

In afternoon trade, the banking giant's shares are up a fraction to $102.30.

As a comparison, the S&P/ASX 200 Index (ASX: XJO) is up almost 1.4% at the time of writing.

Should you buy CBA shares?

The team at Goldman Sachs doesn't believe that investors should be buying the bank's shares just yet.

Although its analysts concede that CBA's result was relatively strong and management's strategy on mortgages is a good one, the broker still doesn't believe it justifies its premium valuation.

Commenting on the result, the broker said:

Cash profit from continuing operations in 1Q24 of c. A$2.5 bn was up 1% vs. 1Q23 and run-rating c. 3% ahead what was implied by our prior 1H24E forecasts, with PPOP in line, but lower-than-expected BDDs.

As for its mortgage strategy, Goldman believes the loss of market share is actually a good thing for margins. It explains:

We like CBA management's decision to step back from the mortgage market. While this has meant the mortgage book shrunk over the last three months, the relative resilience of the resulting NIM, combined with being able to grow other parts of the loan portfolio, drove relative resilience in net interest income.

But as I mentioned above, this still isn't enough for the broker to be more positive on the investment opportunity here. It adds:

Even still, we don't think this justifies the extent of the valuation premium to peers, and note the 58% 12-month forward PPOP premium it is currently trading on versus peers (ex-dividend adjusted), compared to the 28% 15-year average. Coupled with i) a business mix that leaves it more exposed to the current competitive environment, and ii) while CBA has historically done a good job in balancing investment and productivity, we do not think it can escape elevated FY24E cost pressures given heightened inflation; we reiterate our Sell recommendation.

Goldman's sell rating comes with an $81.64 price target, which implies a potential downside of 20% from current levels.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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 Scott Phillips.

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