Amid growing concerns over its overvaluation, CBA’s share price surged another 2.4 per cent on Wednesday to $165.98, fuelled by its latest financial results, which showcased record home lending, increased profit and a $2.25 per share interim dividend.
But for VanEck’s senior portfolio manager, Cameron McCormack, Wednesday’s results solidified the view that CBA remains overvalued, and that the big four bank’s Cinderella story is fast approaching midnight.
“[Wednesday’s] earnings release solidifies our view that CBA remains overvalued.
“The modest 6 per cent reported increase in earnings per share, in our view, doesn’t justify its lofty 27x price-to-earnings multiple, making it the most expensive bank globally.”
CBA’s rise to prominence has baffled experts for much of 2024, with the bank gaining over 40 per cent in the last 12 months.
Commenting on its meteoric rise, AMP’s Shane Oliver said, “It just keeps on keeping on”.
“It’s way overvalued but I have no idea when it will end. As Keynes said, ‘The market can remain irrational for longer than you can remain solvent’.”
Saxo Asia-Pacific senior sales trader Junvum Kim believes CBA’s “robust earnings growth” partly justifies the bank’s high multiple.
“Given its earnings growth and projected dividend growth over the next three years, the stock doesn’t seem to be massively overpriced,” Kim said. “While its dividend yield has compressed due to a stock price rally, CBA maintains the highest projected three-year dividend growth of 2.5 per cent among banks, sustaining strong investor interest.”
Noting that while CBA is the most vulnerable of the big four banks to macroeconomic uncertainty, Kim is confident the bank remains “strategically positioned for long-term growth”.
McCormack, however, believes that CBA’s momentum is unsustainable and urged investors to watch for two key signals likely to trigger an imminent sell-off – a rotation into resources or a systemic crisis.
“We believe the clock is ticking on this Cinderella story and there is limited upside from here,” he said.
McCormack explained that while asset managers have been allocating to CBA rather than the large-cap miners due to China’s economic challenges, this could unwind quickly.
“The significant stimulus announced by Chinese authorities in September last year, which sparked a speedy (albeit brief) rotation away from CBA back to Australia’s resource miners, highlighted how fast dynamics can shift,” he said.
Elaborating further in conversation with InvestorDaily, McCormack said he sees limited potential for further multiple expansion.
“Instead, we believe that better value can be found among the other big four banks and across Australia’s mid and small caps,” he said.
“The other big three banks could outperform CBA due to valuation multiple expansion. With CBA at an all-time high of 27x, the stage is set for Westpac, NAB and ANZ, currently averaging around 17x, to close the gap.”
Moreover, VanEck, he said, is optimistic about consumer discretionary names like Wesfarmers and Lovisa.
“These companies demonstrated earnings resilience during last year’s challenging retail environment. We anticipate retail sales to accelerate once the RBA’s easing cycle begins.”
In a statement to the ASX on Wednesday, Commonwealth Bank said it posted a statutory net profit after tax (NPAT) of $5.14 billion in the half year ending 31 December 2024, an increase of 6 per cent on the same period a year earlier.
The bank’s cash profit, which excludes hedging and demerged businesses, added 2 per cent in the reviewed period to $5.13 billion.
The big four bank’s operating income grew 3 per cent to $14.1 billion in the reviewed period, supported by a “disciplined” approach to volume growth, coupled with stable underlying margin, while first-half operating expenses rose 6 per cent to $6.37 billion.
