Reasons for caution, but CBA stays with strengths
Analysts' share price targets for CBA are now lagging the actual share price by the biggest differential in more than a decade.
According to data provider Capital IQ, the average analyst share price target for CBA is $54.91, more than 11 per cent below the current $62.20 share price.
According to the bank only one analyst maintains a buy recommendation on the stock. This compares to three analysts who have neutral recommendations and seven that have underperform or sell recommendations on the stock.
Not that CBA is particularly concerned. The bank seems to take the view that if all analysts had buy recommendations on the stock it would probably be because the share price had underperformed due to some calamity and that wouldn't be a good thing for shareholders.
On back-of-envelope valuation measures, such as price to book or price to tangible assets, CBA has always looked expensive.
But one of the changes on CBA's share register is the increased presence of offshore institutions. While there has not been much of a change in retail ownership of the stock, foreign institutions' representation on the register has risen from about 15 per cent two or three years ago to about 19 per cent. A part of the increase can be attributed to global index funds such as Vanguard and State Street Global Advisors increasing their holdings in the stock as CBA's market capitalisation rose above $100 billion, making it the seventh-largest bank in the world.
Among this list CBA is the only one to trade at more than twice the book value of its assets and the only one that trades at greater than 14 times forward expected earnings. In other words, of the big boys, CBA's banking franchise is the most highly rated in the world given the size of its home market.
It reflects the fact that federal Treasurer Wayne Swan and his predecessor Peter Costello have achieved nothing in their aim of levelling competition in the Australian banking market.
The fact remains that CBA has an iron-clad grip on Australian retail depositors and its franchise is only getting stronger despite the best efforts of the likes of NAB.
The active investors who have driven the share price gains in CBA have been attracted to a prospective yield that still sits about 5.5 per cent. For a highly liquid, significant business franchise operating in a global market where bond rates are not far off zero this remains a significant one-year return.
The less-than-compelling results of the three other major banks in November also triggered some subsequent switching into CBA stock.
CBA can be seen as a bellwether stock for the rest of the Australian financial services sector. Banking stocks like few others offer a (leveraged) window into the health of the economy. Unlike peers, CBA has sizeable wealth management operations, which means more than 10 per cent of its profits are typically generated by life insurance sales flows into managed funds.
CBA reports its first-half results on February 13. The market is expecting it to post low single-digit earnings per share growth for the next few years. So while the share price has been rocketing, the operational backdrop remains subdued.
The market expects CBA to post a first-half profit of about $3.65 billion, implying growth of 2.3 per cent on last year. But the first-half dividend is expected to be up more than 16 per cent to about $1.60.
Reasons for caution are growing. Chief executive Ian Narev is still just a year into the role and there is talk of offshore acquisitions. To be clear, CBA has the best retail banking franchise in Australia but everything has its price.
Frequently Asked Questions about this Article…
CBA shares rose about 25% last year, driven by investor demand for its yield and franchise strength. The article notes analysts’ average price target is $54.91 versus a current share price of $62.20 (roughly 11% below the market price), and CBA trades at more than twice book value and at over 14 times forward expected earnings — the highest among its large peers. That combination of rapid rerating and rich valuation is why some investors consider the stock expensive.
According to the article (Capital IQ data), analysts’ recommendations on CBA are mixed: only one analyst has a buy, three are neutral and seven have underperform or sell calls. The average analyst share-price target is $54.91, which sits about 11% below the reported $62.20 market price, showing analysts’ targets are lagging the actual share movement.
The article says foreign institutional representation on CBA’s register rose from about 15% a few years ago to around 19% more recently. Part of that increase is linked to global index funds such as Vanguard and State Street Global Advisors adding CBA as its market cap rose above $100 billion. Higher offshore ownership can increase demand and liquidity, and it helped push CBA into the position of the seventh-largest bank in the world by market capitalisation.
CBA is described as the most highly rated of the large banks relative to the size of its home market: it’s the only one among its peers trading at more than twice book value and the only one trading above 14 times forward expected earnings. Put simply, CBA is pricier on common valuation measures than the other big banks.
Investors have been attracted to a prospective yield of about 5.5% for CBA — a notable one-year return for a large, liquid bank. The market was expecting a first‑half profit of about $3.65 billion (around 2.3% growth year‑on‑year) and a first‑half dividend of roughly $1.60 (an increase of more than 16%). Analysts also expect low single‑digit earnings‑per‑share growth over the next few years.
Yes. The article highlights several cautionary points: the share price has rerated very quickly, analyst targets lag the market, CBA already trades on high valuation multiples, and operational growth is expected to be subdued (low single‑digit EPS growth). The chief executive, Ian Narev, was still only a year into the role at the time of the article, and there was talk of possible offshore acquisitions — all reasons to carefully consider valuation and risk tolerance before buying.
CBA is described as a bellwether for the Australian financial services sector — banking stocks offer a leveraged view of the economy’s health. Unlike some peers, CBA has sizeable wealth‑management operations: more than 10% of its profits typically come from life insurance sales flows into managed funds, giving its profit mix extra exposure to wealth-management performance.
Yes. The article notes that the less‑than‑compelling results of the three other major banks in November prompted some investors to switch into CBA stock, helping support CBA’s share‑price gains as investors favored its relative strength and yield.
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