CBA is now worth over $300 billion, but the experts are cautious

Commonwealth Bank this week hit a new milestone when its market value broke through $300 billion, continuing to defy sceptical analysts who have long struggled to make sense of the gravity-defying rise in the banking giant’s shares.

CBA shares are up almost 47 per cent in the past year, and the bank’s market value is on par with global powerhouses such as Wall Street titan Goldman Sachs. CBA’s market value is far greater than the combined value of its two largest rivals: Westpac and National Australia Bank.

Commonwealth Bank’s sharemarket valuation broke through $300 billion this week.Credit: Oscar Colman

The Sydney-based bank has also led a powerful sector-wide rally in bank shares: Citi analysts say banks have outperformed the ASX 200 by 27 per cent since the start of 2024.

But despite the bank’s bumper share price, which ticked up to $181.34 on Thursday, some analysts say they see a more subdued outlook for bank shares, pointing to pressure on profit margins from the expected fall in interest rates.

Others are cautioning that after the surge in bank shares, investors should be aware of the possibility of a “rotation” towards miners, the other major sector of the ASX.

Morgan Stanley analyst Richard Wiles on Thursday argued there were “downside risks” to major bank share prices, saying various forces that supported the sector in 2024 were starting to fade.

Wiles said that in particular, net interest margins (banks’ funding costs compared with what they charge for loans) appeared to have peaked, while the outlook for dividends and buybacks was also more subdued.

Wiles said the CBA’s price-to-earnings multiple – a key measure of a stock’s valuation – had hit 28 times, and this was “very difficult to justify” given the outlook for CBA profit growth.

By contrast, he said that between 1997 and 2019, CBA shares traded on a price to earnings multiple between 10 and 16.5 times.

“I’m a fundamental sell-side analyst. We need to have valuation as an anchor for our recommendations, and at 28 times earnings, I think investors should be underweight the stock,” Wiles said.

Citi analyst Thomas Strong, meanwhile, highlighted the risk of investors being “wrong-footed” if there is a change in how investors look at the two biggest sectors of the ASX: banks and miners.

He said banks and miners constitute about 45 per cent of the Australian market and banks had outperformed over the past 18 months, but earnings expectations were now being downgraded and valuations looked full.

MST Marquee analyst Brian Johnson there had long been debate over whether CBA was overvalued, but the crucial question was how it looked compared with other big ASX stocks such as BHP, Fortescue, CSL or Woolworths.

Johnson, who has a “hold” rating on CBA shares, said that superannuation funds – which will have higher inflows from July as mandatory super contribution rates increase – needed to invest somewhere. While CBA’s outlook was relatively solid, he said it would attract investors.

AMP chief economist Shane Oliver said the heavy role of banks and miners in the ASX meant investors were more exposed to the fortunes of these sectors. But he said superannuation funds had reduced these risks by investing more of their portfolios overseas.

“It does pose a risk, but for most Australians I think it’s handled by having a well-diversified portfolio, including by having global shares.”

Meanwhile, investment manager Martin Currie told the corporate watchdog in a submission that CBA shares traded less frequently than other big companies, given its size. It said that if index weights were less concentrated it could free up capital for smaller companies and encourage more firms to list.

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