Would I be crazy to buy CBA shares at $121?

The CBA share price is close to an all-time high.

| More on:
excited investor making fist at computer screen

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

The Commonwealth Bank of Australia (ASX: CBA) share price has soundly outperformed the S&P/ASX 200 Index (ASX: XJO) in the last six months, rising by 17% compared to the index's 11% increase.

After such a strong run, investors may be questioning whether the ASX bank share can still be a good investment with the price/earnings (P/E) ratio now above 20.

The higher the earnings multiple valuation goes, the more risk there is of overpaying. Valuation itself can be an issue with an investment.

Expert's rating on CBA shares

Writing on The Bull, Arthur Garipoli from Seneca Financial Solutions has called Australia's biggest bank a sell.

He gave his verdict after looking at the FY24 third-quarter result which was "marginally better than expected". Garipoli noted the CBA update reflected "similar themes to its peers". The expert then said:

We note a decline in net interest margins and lower revenue growth coupled with increasing cost pressures. We acknowledge CBA is the premier bank, but we can't justify its valuation premium compared to competitors. Investors may want to consider taking a profit.

The quarterly profit generated by the bank was approximately $2.4 billion, down 5% year over year. CBA reported a loan impairment expense of $191 million, with collective and individual provisions "slightly higher". The bank said its lending portfolio's credit quality remained "sound", though there were "moderate increases in both consumer arrears and corporate troublesome exposures".

Valuation premium compared to other ASX bank shares

There are a few different ways to value a business, with the P/E ratio being one of the easiest methods.

As mentioned above, CBA shares are trading on a much higher earnings multiple than peers. According to the (independent) forecast on Commsec, the CBA share price is valued at 21x FY24's estimated earnings.

Now, let's compare that to the other major banks using the forecasts on Commsec.

The ANZ Group Holdings Ltd (ASX: ANZ) share price is valued at 12.6x FY24's estimated earnings.

The Westpac Banking Corp (ASX: WBC) share price is valued at 14.5x FY24's estimated earnings.

The National Australia Bank Ltd (ASX: NAB) share price is valued at 15.4x FY24's estimated earnings.

Based on those numbers, CBA's P/E ratio is 36% more expensive than NAB's and over 66% more costly than ANZ's.

Foolish takeaway

CBA is an excellent bank – that's why investors value it so highly.

However, the high CBA share price means it's much more expensive than its peers. The rise of the CBA share price has also pushed the current grossed-up dividend yield down to 5.3%.

Based on all of the above factors, it may be better to give CBA shares a miss until the forward P/E ratio becomes more attractive.

Motley Fool contributor Tristan Harrison 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.

More on Bank Shares

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

What is the outlook for CBA shares in FY25?

Can investors bank on another good year from CBA in FY25?

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank representing bank dividends and in particular the CBA dividend
Bank Shares

Here's how much I'd have if I'd bought 500 CBA shares 10 years ago

You won’t hear many long-term shareholders complaining about their CBA stock.

Read more »

Delighted adult man, working on a company slogan, on his laptop.
Bank Shares

Up 39% in a year, the NAB share price just hit a 9-year high!

NAB shares have flown higher in the past 12 months.

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Bank Shares

If I buy 1,000 ANZ shares, how much passive income will I receive?

Let's see how much income this banking giant's shares could provide.

Read more »

Friends at an ATM looking sad.
Bank Shares

Big bank bargain: Are this week's tumbling ASX 200 bank shares a good buy?

Here what the experts have to say about it.

Read more »

a small child in a judo outfit with a green belt strikes a martial arts pose with his hand thrust forward and a cute smile on his face.
Share Gainers

Guess which ASX All Ords stock just rocketed 9% after being added to the ASX 200

Investors are bidding up the ASX All Ords stock ahead of its addition to the ASX 200.

Read more »

Woman in an office crosses her arms in front of her in a stop gesture.
Bank Shares

1 popular ASX stock I'm steering clear of

I’m not banking on this stock to deliver strong growth.

Read more »

A man looking at his laptop and thinking.
Dividend Investing

Are CBA shares losing their passive income credentials?

CBA shares have long been favoured by passive income investors.

Read more »