Has Commonwealth Bank lost its edge?

Morgan Stanley has downgraded CBA to its least preferred of the big four, saying its premium is hard to justify.

Morgan Stanley suggested CBA had lost its long-term edge over its competitors.

Commonwealth Bank’s outperformance against its chief rivals is set to come to a swift end, Morgan Stanley analysts have concluded in a note that has caused a stir on markets today.

CBA, long the market darling, is now Morgan Stanley’s least preferred of the big four after a rating cut from ‘equal-weight’ to ‘underweight’, while rival ANZ is trending in the opposite direction with an unusual double upgrade from ‘underweight’ to ‘overweight’.

The actions had an immediate impact on the fate of the two behemoths on the local bourse, with ANZ surging 1.6 per cent against a weak market and CBA tumbling 1.4 per cent to serve as the clear laggard in the sector.

Analysts headed by Richard Wiles said the recent quarterly updates from the big four suggested CBA had lost its long-term edge over its competitors, meaning its premium valuation was “difficult to justify”.

“We downgrade to underweight because a falling return on equity makes CBA vulnerable to an ongoing de-rating,” he said.

“We see slowing momentum in retail banking, dilution from the corporate banking growth strategy, limited margin for error on loan losses and a potential $7 billion capital build.”

Morgan Stanley argues CBA could be forced to tap shareholders for cash to raise its tier-one capital ratio from around 9.3 per cent to a likely 10 per cent regulatory requirement.

“On our estimates, CBA’s potential capital build of about $7bn is higher than peers, increasing the risk of a capital raising or DRP underwriting,” Mr Wiles said.

It served as a sour contrast to a suddenly sweet view on ANZ, which Morgan Stanley now lists as its preferred buy in the sector.

The change comes after two years of underperformance from ANZ as a series of damaging stories surfaced, from problems with its trading culture to a bitter court battle with Pankaj and Radhika Oswal, a public spat with prominent broker Angus Aitken and allegations of rate rigging.

Mr Wiles and his team tagged five reasons for their renewed optimism, with the focus the potential for a comparatively strong showing against its rivals.

“We think the new institutional bank strategy can work, the risk of a capital raising has receded, the dividend outlook is better than that of the other majors and the two-year earnings per share downgrade cycle is ending,” the note read.

“These factors can drive a re-rating versus peers.”

Morgan Stanley lifted its price target for ANZ from $23.90 to $28.50, while CBA was trimmed from $72.50 to $68.

At 3pm (AEST), ANZ shares traded up 1.6 per cent at $26.96, while CBA was off 1.4 per cent at $71.91.