Why the CBA share price premium is 'difficult to justify'

ASX experts' calls that CBA shares are too expensive are getting louder.

| More on:
A man looking at his laptop and thinking.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It seems to have become highly fashionable on the ASX to question the valuation of the Commonwealth Bank of Australia (ASX: CBA) share price of late.

CBA shares have enjoyed an extremely lucrative few months. It was only back in late October that the share price of the ASX 200's largest bank stock was sitting around $96. But CBA has rebounded spectacularly ever since and has even spent 2024 so far hitting a series of new all-time record high share prices.

Today, CBA is sitting at $116.30 a share (at the time of writing), less than $2 away from its most recent all-time high of $118.24.

But this 20% rise since October has prompted many ASX experts to question the valuation that investors are now pricing Commonwealth Bank at. Earlier this month, my Fool colleague James went through ASX broker Goldman Sachs' rather dim view of the bank.

ASX experts call out CBA share price as overvalued

As we discussed at the time, Goldman reiterated its sell rating on the CBA share price, giving it a 12-month price target of just $81.98. That implies CBA shareholders could be facing an approximate 30% haircut over the coming year.

Here's some of what Goldman said to justify its bearishness:

…we do not think this justifies the 55% 12-month forward PPOP premium CBA is currently trading on versus peers (ex-dividend adjusted), compared to the 29% 15-year average… despite historically good performance on balancing investment and productivity, we stay Sell.

Goldman isn't alone in this line of thinking either.

As reported by The Bull, Philippe Bui of Medallion Financial Group has also recently given the CBA share price a sell rating. And lo and behold, valuation concerns were central to this view as well.

Here's what Bui had to say:

The CBA is the best of the big four banks, in our opinion. However, in the absence of strong earnings per share growth, it's difficult to justify CBA's premium compared to the other banks.

Statutory net profit after tax of $4.837 billion in the first half of fiscal year 2024 fell 8 per cent on the prior corresponding period. The net interest margin of 1.99 per cent was down 11 basis points.

In our view, it will be difficult to pay out increasing dividends if earnings don't improve.

It is hard to ignore CBA's valuation compared to even the other members of the big four. At current pricing, the CBA share price trades on a price-to-earnings (P/E) ratio of 20.33. In contrast, ANZ Group Holdings Ltd (ASX: ANZ) is sitting on a P/E of just 12.55.

This in effect means investors are paying 62% more for a dollar of CBA's earnings than a dollar of ANZ's.

That's something all CBA shareholders might want to keep in mind.

Motley Fool contributor Sebastian Bowen 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.

More on Bank Shares

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Earnings Results

CBA shares drop despite strong first-half profit result and dividend boost

Investors appear to have been wanting an even stronger result from Australia's largest bank.

Read more »

A man looking at his laptop and thinking.
Bank Shares

Own NAB shares? What to watch in next week's trading update

Owners of this bank’s shares should keep an eye on this upcoming report. 

Read more »

A woman wearing yellow smiles and drinks coffee while on laptop.
Earnings Results

CBA share price on watch after half-year profit beat

Australia's largest bank has delivered a strong result this morning. Here's what it reported.

Read more »

Happy man at an ATM.
Bank Shares

CBA shares fall amid branch news ahead of HY25 result

The major bank has announced an initiative about its banking network.

Read more »

A man looking at his laptop and thinking.
Bank Shares

Why passive income investors should sell CBA shares now

Two leading investment experts say now is the time to sell CBA shares. But why?

Read more »

Woman with a scared look has hands on her face.
Bank Shares

Own Westpac shares? What to watch in next week's update

Keeping an eye on earnings season? Westpac is set to release important results next week. 

Read more »

A woman sits on sofa pondering a question.
Bank Shares

Why Westpac shares are a sell before any RBA interest rate cut

This leading expert recommends taking profits on Westpac shares.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Bank Shares

Which ASX bank share I'd buy for dividends

I’m cautious on some bank stocks for dividends, here’s why.

Read more »