Are CBA share buyers getting the highest growth in return for being the most expensive?

Can higher growth justify the CBA share price premium?

| More on:
A woman in a bright yellow jumper looks happily at her yellow piggy bank representing bank dividends and in particular the CBA dividend

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'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%.

Motley Fool contributor Sebastian Bowen has positions in National Australia Bank. 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 woman works on her desktop and tablet, having a win with crypto.
Bank Shares

Own NAB shares? The bank just made an important crypto investment

NAB just increased its crypto exposure.

Read more »

Woman relaxing on her phone on her couch, symbolising passive income.
Dividend Investing

Here's how much passive income I'd get if I invested $20,000 in Westpac shares now

A $20,000 investment in Westpac shares could deliver some welcome additional passive income.

Read more »

Woman on her laptop thinking to herself.
Bank Shares

Are ANZ shares undervalued considering its FY25 outlook?

Do you know how much profit ANZ is forecast to make in FY25?

Read more »

A man in a suit looks serious while discussing business dealings with a couple as they sit around a computer at a desk in a bank home lending scenario.
Bank Shares

What's the outlook for the Westpac share price in FY25?

Top broker Goldman Sachs outlines three challenges for the ASX 200 bank in FY25.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Broker Notes

Is the ANZ share price 'the best value of the major banks'?

ANZ shares are in the green today.

Read more »

A man looking at his laptop and thinking.
Bank Shares

'Attacked from all angles': Why this fundie is betting against the momentous rally in CBA shares

Up 27% in a year, this top fund manager believes the CBA share price rally is overdone. But why?

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Can owners of NAB shares bank on a good outlook for FY25?

Can NAB keep outperforming the market? The outlook is clouded.

Read more »

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 »