‘It’s overvalued’: CBA defies the sceptics to hit record $121.54

CBA’s market value has ballooned by $50bn over the past six months as its shares have soared more than 25 per cent to a record high of $121.54, but many analysts say it’s overvalued.

Shares in market heavyweight Commonwealth Bank continue to defy the sceptics, soaring past $120 for the first time.

The stock traded at an all-time peak of $121.54 before easing slightly to finish the week at a record close of $121.45, a 1.8 per cent gain for the day, as the broader market also reached a new high.

The banking giant now has market value of $203bn, making it the second largest stock on the bourse behind BHP at almost $223bn.

The ASX 200 closed up 1.1 per cent to a new record high of 7874 points on Friday, with the big four banks all performing well.

Westpac jumped 2.6 per cent to $27.70, National Australia Bank added 2.3 per cent to $35.11 and ANZ was 1.7 per cent higher at $29.81.

Banking stocks have been on a tear for the past six months, with CBA rallying more than 25 per cent since the end of October, while the benchmark S&P/ASX 200 is up almost 16 per cent over that period. Westpac shares have surged 35 per cent since the end of October, while NAB is up 26 per cent and ANZ and just over 21 per cent.

IG market analyst Tony Sycamore said CBA was trading on momentum, and he noted that big US broking firms had put much lower share price targets near $80 on the stock.

“Smarter minds than me are saying it’s overvalued, but it is a momentum play at the moment,” he said.

“I wouldn’t want to put a target on it.”

If the momentum continued and positive data pushed markets higher, CBA shares could head towards $125 “but that’s pushing the envelope in terms of valuations,” Mr Sycamore said.

“The appetite to buy banks is unrelenting at this point in time, and CBA with the best name and margins seems to be the leader,” he said. “People love the shares and want the dividend.

“Every six months those dividends come through and it’s a brand that people are comfortable with.”

Commonwealth Bank shares are up more than 26 per cent since October.

After CBA reported a 3 per cent dip in first half cash earnings to $5.02bn last month, Morningstar equity analyst Nathan Zaia revisited market concerns about the big bank’s “stretched” valuation. CBA’s shares are trading almost 35 per cent above his fair value estimate of $90 per share.

“There is an attractive laundry list of reasons to own the bank: lowest cost/income ratio; lowest funding costs; highest funding sourced from sticky customer deposits; strongest organic capital generation; leading digital offerings; highest exposure to mortgages (assets with lowest loss rates); and a strong track record of dividend growth,” he said in his post-earnings note. “However, Commonwealth Bank is not attractive at any price. To borrow from investor Howard Marks, “Investment success doesn’t come from buying good things, but buying things well.”

He is expecting higher medium-term bad debts to be an earnings headwind with deposit competition and home loan discounting weighing on its net interest margins.

In January this year when CBA hit its then record of $114, The Australian reported on analysts and brokers worrying if CBA has climbed too far. Many analysts now have “sell” or “reduce” recommendation on CBA, claiming its outperformance has made the shares significantly overvalued, and it has a dividend yield way below its peers.

Analysts at Jarden this week put a new 12-month price target of $102 on CBA, up from $99 previously.

Jarden chief economist Carlos Cacho and analyst Jeff Cai noted the banking sector had started the year strongly, outperforming the S&P/ASX 200 index by 7 per cent so far.

“Given the positive macro backdrop, we think this performance can likely continue in the near term,” they said.

In its latest report, Moody’s Ratings has given a “stable outlook” for Australia’s banking system reflecting strong balance sheets amid rising asset risks.

“Banks are well positioned to weather a likely weakening of asset quality,” Moody’s said. “Asset risk will rise as borrowers remain under pressure from elevated interest rates and high – though falling – inflation. Profitability is also likely to weaken as increasing funding costs lead NIMs (net interest margins) to narrow.

“Strong balance sheets support stable outlook even as asset risks rise”

Moody’s expects Australia’s economic growth will slow but only modestly.

“We expect Australia’s real GDP growth to slow to 1.5 per cent in 2024 from an estimated

1.9 per cent in 2023, as consumer spending remains subdued amid high interest rates and an increase in the cost of living. We forecast the real GDP growth rate will rebound to 2.3 per cent in 2025.

“Strong population gains will support Australia’s economic growth by bolstering domestic demand and providing a boost to investment in non-mining businesses. On the other hand, growth in household spending has been slowing, and we expect this trend to continue as high inflation suppresses real income growth.”