Is CBA the most expensive global bank share of all time?

Have investors become too bullish on the major bank?

| More on:
A woman wearing a yellow shirt smiles as she checks her phone.

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 (mostly) had a great 2024 to date, rising by almost 17%. The S&P/ASX 200 Index (ASX: XJO) has only climbed around 3%. But, some investors are now wondering whether the ASX bank share has become too expensive.

Net profit after tax (NPAT) growth is an important part of ensuring that a company's valuation is sustainable and the share price can keep rising.

If the share price rises faster than profit growth, it can lead to an increasing price/earnings (P/E) ratio. The higher the P/E ratio, the more expensive it can seem.

Fund manager L1 Capital has examined the ASX bank share CBA and drawn some conclusions about the Australian bank's valuation.

Expanding P/E ratio

L1 noted that CBA shares rose by 8% in July, predominately driven by "P/E multiple expansion with earnings estimates relatively unchanged".

The fund manager calculated that the CBA share price was trading at 23x the estimated profit that a consensus of analysts thinks the ASX bank share could generate in the 2025 financial year.

L1 Capital noted that the bank is trading on a price-to-tangible book ratio of around 3.4x. This is "higher than any large-cap developed market bank has ever traded".

Is the CBA share price fair value?

A high valuation may be able to be justified, if it's delivering profit growth for shareholders.

Does the current price make sense? In the words of the fund manager:

This valuation is hard to justify in the context of limited earnings growth over the medium term and continued tail risk in the event of any economic weakness.

While recognising that CBA is outperforming Australian peers operationally and that it enjoys a dominant local market share (one of the strongest of any banks worldwide), we think the company is priced to perfection with insufficient reward against any downside risks.

What about the dividend yield?

Some investors may be attracted to ASX bank shares for passive income. However, L1 Capital isn't convinced that the payouts for owners of CBA shares are worth it either. The investment team wrote:

In addition, while many investors own domestic banks for their consistent dividends, CBA currently trades on relatively modest dividend yield of ~3.6%.

CBA share price snapshot

The Commonwealth Bank share price has surged by 25% over the past 12 months. That compares to a rise of 6.7% for the ASX 200 over the past year.

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 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 »

A young bank customer wearing a yellow jumper smiles as she checks her bank balance on her phone.
Bank Shares

CBA shares: Another day, another new record high

What's behind CBA's latest push into record territory?

Read more »

A beautiful ocean vista is shown with a woman whose back is to the camera holding her arms up in triumph as she stands at the top of a rock feeling thrilled that ASX 200 shares are reaching multi-year high prices today
Bank Shares

Big ASX news: NAB shares hit 18-year high

The last time NAB shares were at this level was in November 2007.

Read more »

A man watches the share price movement closely.
Bank Shares

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

Australia’s biggest bank will release important results next week. 

Read more »

Four friends watching sport and upset at their team losing.
Bank Shares

Why are ASX 200 big four bank shares down this week?

The big four bank shares have all dipped to start the week. 

Read more »

Male hands holding Australian dollar banknotes, symbolising dividends.
Bank Shares

NAB shares: Will the dividend or a term deposit get you more cash today?

The difference between the NAB dividend and a term deposit might shock you.

Read more »

two businessmen shake hands in a close up mid-level shot with other businesspeople looking on approvingly in the background.
Bank Shares

Westpac shares higher after nabbing CBA executive

Australia's oldest bank has made a key appointment to its executive team.

Read more »

A young bank customer wearing a yellow jumper smiles as she checks her bank balance on her phone.
Bank Shares

Up 38% in a year, why the CBA share price outpaced the benchmark again in January

CBA shares delivered another month of strong returns in January. But how?

Read more »