It's no secret that amongst the ASX bank stocks, Commonwealth Bank of Australia (ASX: CBA) shares are the premium option on the investing menu.
Commonwealth Bank shares have long delivered capital gains that would make the owners of other ASX banks green with envy.
To illustrate, the CBA share price is today sitting at a five-year gain of 53%. That's almost double that of National Australia Bank Ltd (ASX: NAB), which has returned 29.2% over the same period.
It runs rings around ANZ Group Holding Ltd's (ASX: ANZ) 2.6% increase over the same period, and laughably better than Westpac Banking Corp's (ASX: WBC) loss of 2.44%.
CBA is also up 20.67% over just the past 12 months, and has raced 5.8% higher over 2024 to date.
Check all of that out for yourself here:
But the downside of this extraordinary success is that today, CBA shares trade at a significant premium to their banking peers. And 'significant' is arguably an understatement.
Today, CBA shares are commanding a price-to-earnings (P/E) ratio of 20.99. For one, that's 33.6% more expensive than even its closest rival – NAB on an earnings multiple of 15.7. But it runs rings around Westpac's 14.95 and makes ANZ's 12.52 P/E ratio look silly.
So, to put it simply, investors are today being asked to pay almost $21 for every $1 of CBA's earnings, but they are only being asked to fork out $12.52 for every $1 of ANZ's earnings.
Are CBA shares worth the premium price compared to other ASX banks?
It is the conventional wisdom on the ASX that higher P/E shares tend to have better growth prospects than ones with low P/Es. That's why investors are happy to pay more for the company.
But is this really the case with CBA? Sure, it is the largest ASX bank in terms of both sheer size and market share. It can also be argued that CBA is a higher-quality business. But let's dig into whether this P/E ratio can be justified.
Comparing bank earnings is always a little tricky because the big four's financial calendars don't exactly align. But we can do some quick comparisons regardless.
Earlier this month, CBA released a quarterly update covering the three months to 31 March 2024. As we covered at the time, this had CBA report a 5% drop in statutory net profits after tax to $2.4 billion.
This actually looks worse than the half-year report ANZ delivered around the same time. This had ANZ reveal a 4% fall in profits after tax to $3.41 billion for the six months to 31 March.
NAB's half-yearly earnings report for the same period advised an underlying profit of $5.47 billion, which was a whopping 10.6% drop over the previous corresponding period.
Westpac also released a half-year earnings report around the same time. This report revealed that the ASX bank suffered an 8% decline in net profits to $3.51 billion over the six months to 31 March.
Foolish takeaway
Yes, CBA's latest earnings update covered only three months, while the other major banks reported for six months. But it doesn't exactly show CBA's earnings leading the pack.
This might be why most ASX analysts are describing the CBA share price as overvalued at the current time.
However, the market is still pricing CBA at a significant premium compared to its peers in ANZ, NAB, and Westpac. Only time will tell if the bank's future earnings can justify that.
At the latest CBA share price, this ASX 200 banking giant has a market capitalisation of $198.97 billion, with a dividend yield of 3.79%.
