Why are CBA shares sliding following the bank's quarterly update?

ASX 200 investors are bidding down CBA shares on Thursday. But why?

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Commonwealth Bank of Australia (ASX: CBA) shares are in the red today.

Shares in the S&P/ASX 200 Index (ASX: XJO) bank stock closed yesterday trading for $119.74. In early afternoon trade on Thursday, shares are swapping hands for $117.59, down 1.8%.

For some context, the ASX 200 is down 0.9% at this same time.

This comes following the release of CBA's quarterly update for the three months ending 31 March.

What did the big four bank report?

Among the key financial metrics for the quarter, the bank reported a 1% year on year decrease in operating income. That dip came along with a 2% increase in operating expenses.

Combined, this saw CommBank's unaudited statutory net profit after tax fall 5% from the prior corresponding quarter to $2.4 billion, which could explain why CBA shares are underperforming today.

From a risk perspective, the bank remains well capitalised with a Common Equity Tier 1 (CET1) ratio of 11.9%. That's well above the minimal 10.25% ratio required by the Australian Prudential Regulation Authority (APRA).

Why are CBA shares under pressure today?

CBA shares are sliding today despite what Citi called a "positive result" for the quarter, citing the improvement of net interest margins (NIM).

According to Citi analyst Brendan Sproules (quoted by The Australian), "The stabilisation and likely modest improvement in the NIM reflects, in our view, the stabilisation in retail banking, augmented by better channel mix in mortgages."

Sproules added, "We expect the market to receive the result well from a fundamental perspective, although the valuation still remains very challenging from our perspective."

Indeed, it's the often-cited overvaluation of CBA shares relative to its peers that has a number of brokers forecasting price targets well below current levels.

With the bank's $2.4 billion quarterly profit modestly exceeding consensus expectations, Evans & Partners expects we may see analysts boost their profit forecasts.

"We expect consensus core profit upgrades of ~2 per cent for FY25F and FY26F. Asset quality is deteriorating in similar fashion to that generally seen in other major bank results over the last week," the broker said (quoted by The Australian Financial Review).

Despite that expectation, Evans & Partners has a 'sell' rating on CBA shares with an $80 price target.

UBS also has a 'sell' rating on the biggest Australian bank, though with a higher price target of $105 a share.

According to UBS (quoted by the AFR):

Despite a visible deterioration in asset quality metrics, we think the credit impairment charges today suggest some consensus upgrades are likely for 2H 24 cash earnings…

CBA continues to lean on its proprietary distribution channels to defend and drive volume growth in mortgages – a strategy which has so far seen CBA grow at 0.7x system. Defending back-book profitability remains a key imperative for management.

Despite today's retrace, CBA shares remain up a healthy 21% since this time last year.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben has no position 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 Scott Phillips.

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