Commonwealth Bank of Australia: Resilience Amid Valuation Concerns

By Sameer Manekar

(Reuters) – Commonwealth Bank of Australia (OTC:CMWAY)’s strong asset quality is expected to help the lender deliver marginal cash earnings growth in the first half. However, analysts believe its lofty valuation seems untenable amid rising macroeconomic headwinds.

Shares in CBA, Australia’s biggest bank, have soared nearly 70% since November 2023 when the central bank lifted interest rates to a 12-year-high. This has propelled the stock to trade at more than 26 times its future earnings with a 4.1% dividend yield.

In comparison, an MSCI gauge of world banks, which includes JPMorgan, Bank of America, Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C), is trading at 11 times future earnings with a 3.65% dividend yield.

Despite the valuation concerns, investors in Australian banks, particularly CBA, perceive them as a safe haven due to strong fundamentals and attractive returns. This comes at a time when the resources sector, traditionally more dominant, struggles with muted commodity demand from China.

UBS analysts noted, “Australian banks, despite being low growth, continue to offer stable and predictable earnings/dividends.”

The lender is widely expected to report flat to low single-digit growth in cash net profit on Wednesday, per analyst consensus, with a slight uptick also forecast in net interest margin and common equity tier 1 capital—key metrics of profitability and spare cash.

Citi analysts wrote that “CBA looks set to benefit from strong management execution, a reputation as a ‘safe haven’ within the banks, and better credit quality from its larger skew to retail banking.”

However, while earnings may prove resilient, CBA’s high trading multiples might be at risk from an easing in monetary policy and trade jitters. Analysts suggest a rotation back into miners—now trading at significant discounts—threatens its frothy valuations.

Saxo Asia Pacific’s senior sales trader Junvum Kim noted, “The anticipated RBA (Reserve Bank of Australia) rate cut could compress net interest margins, challenging profitability even if lending increases.”

He added, “If banks struggle to justify high valuations, investors might rotate into mining, where strong commodity prices could offer better returns,” highlighting that trade war jitters and unexpected regulatory changes could further affect earnings.

The other three of the “Big Four” lenders: National Australia Bank (OTC:NABZY) (NAB), Westpac, and ANZ Group are on a different reporting schedule than CBA. They will issue limited first-quarter trading updates next week, with all banks expected to report little to no growth in their net interest margins. NAB is forecast to report a marginal drop in its first-quarter cash earnings.