Top fund managers have dismissed Commonwealth Bank (ASX: CBA) shares as a capital sinkhole given the lender's no more immune to an economic downturn than any other Australian business.
On Wednesday morning, Australia's biggest bank posted a first-half dividend up 5 per cent to $2.25 per share on earnings per share (EPS) up 2.3 per cent to $3.07.
Net profit climbed 2.3 per cent, with the stock trading on 26.4 times annualised EPS of $6.14 at $162.84 this morning.
David Berthon-Jones the joint chief investment officer of Aequitas Investment Partners said investors are better off buying other local or international banks if they want exposure to financials.
"CBA's priced like a growth stock, but it's not," he said. "That earnings growth rate is somewhere between 2 and 6 per cent depending on where you think credit growth will go and what kind of NIM [profit margin] they can extract from their customer base.
"If you look abroad you've got comparable banks like JP Morgan where the returns on equity are much higher and the price-to-book multiples are much lower."
CBA is also wildly overvalued versus its peers National Australia Bank, Australia & New Zealand Bank and Westpac given they all operate in the same Australian economy, but offer cheaper valuations, according to Mr Berthon-Jones.
Commonwealth Bank share prices and price-to-earnings ratio
Commonwealth Bank share price (top) and price-to-earnings ratio (bottom). Source: TradingView. Note: PE cuts off at the end of 2024
"The underlying economic conditions are the same for all four," he said. "The same [mortgage] arrears and credit growth dynamics, but half the valuation for the other three.
"What drives me mad [about CBA's valuation] is that banks are geared beasts and highly leveraged to the economic cycle, as they're all sensitive to things like employment growth, jobless rates, and wages growth. This is all tied to how Australians can service their mortgages.
"So, CBA should be priced with the awareness that there's tail risk inherent across the sector and if you wind up highly valued and highly geared into an economic slowdown you have problems.
"You must manage money on the assumption that at some point you get a cyclical downturn, so you want to have a portfolio of growth, yield and defensiveness. But CBA doesn't tick any of those boxes it's not a growth stock, it's not a yield stock, it's highly levered and other companies offer the same characteristics but they're all growing quicker or cheaper."
Insufficient income and growth
For income investors, CBA declared an interim dividend up 5 per cent to $2.25, with a yield of 2.9 per cent based on $4.75 in trailing dividends from the last 12 months. Mr Berthon-Jones warned this is lower than what investors can get on risk-free cash savings deposits or government bonds.
While for investors seeking capital appreciation, Mr Berthon-Jones said the bank's price-to-earnings multiple of EPS isn't justified given profits are forecast to track sideways or marginally higher over the next 12 months.
"Here you have comparable stocks with faster earnings growth and similar iconic quality, I think CSL for example got carted out yesterday," he said.
World's most expensive bank stock
As part of this morning's profit report, the bank's chief executive, Matt Comyn, warned that the fastest pace of interest rate rises imposed by the Reserve Bank in a generation (between May 2022 and December 2023) is now taking its toll on consumers.
"The Australian economy has slowed considerably, with cost of living pressures continuing to weigh on consumer demand and younger customers in particular," Mr Comyn said.
Investors and the general public are now pinning their hopes on the Reserve Bank delivering a 25 basis point interest rate cut on February 18 to lower the cost of debt.
Despite the prospect of cheaper borrowing rates, sell-side analysts at investment banks and brokers almost universally rate the stock a sell in agreement with many professional investors.
Fund manager Garry Laurence, the founder of Profeta Global Investments, joined the pile on.
"It's probably the most expensive bank stock in the world," he said of CBA. "If you look at the price earnings and price-to-book ratios it trades on relative to earnings growth," he said.
Garry Laurence of Profeta Investments said CBA is probably the most expensive bank stock in the world.
The bank's shares traded up 0.4 per cent to $162.84 near lunchtime as many in the market put its shock 12-month rise down to the weight of money from passive index-tracking funds and overseas investors pushing the valuation up.
Elsewhere, China's downturn and price deflation problems have also encouraged large investors to sell resources stocks and look for other places to park their cash, including in CBA shares.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
