Commonwealth Bank’s share price boom: where will they go next?

Banks are tipped to book lower profits this year, but CommBank’s share price defies expectations – pleasing its 800,000 shareholders.

Australia’s biggest big bank has long been viewed as Australia’s best big bank, but its surging share price is prompting analysts and brokers to worry it has climbed too far.

Shares in Commonwealth Bank hit a record high of $114 last week, while its big four peers remain well below their respective records: Westpac down 42 per cent from its peak in 2015, NAB 25 per cent below its record high set way back in 2007, and ANZ 29 per cent lower than its 2015 record.

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.

The premium is reflected in its price-earnings ratio, a key measure used by analysts, of 20 times the current financial year’s forecast earnings according to Morgan Stanley Research. It says NAB’s current PE is 14.3, Westpac 12.6 and ANZ 12.5.

CommBank shares reached a record high this week. Picture: NCA NewsWire / Morgan Sette

Baker Young managed portfolio analyst Toby Grimm said CBA historically traded at a premium to its big four peers, but he could not recall any time in his many years as a portfolio manager that there was such a big difference between PEs.

This was causing its dividend yield to sink below 4 per cent, Mr Grimm said.

“The other big four banks are up around 6 per cent, and when you add in franking credits that’s a very significant after-tax difference,” he said.

But CBA could still go higher, having just broken through record highs, Mr Grimm said.

“It good go to $125 on a technical analysis,” he said.

“People don’t want to be the one to buy a stock at an all-time high, and the fact that it has managed to push through that level now is a bullish signal.”

Mr Grimm said if CBA rallied towards $125 it would be considered more of a sell.

“Commonwealth Bank has been the leader in investing in technology and has that competitive advantage, and has already undertaken the investment required to get to that point,” he said.

“The others are trying to play catch-up … and that’s leading to a slightly superior financial performance for CBA.”

Shaw and Partners senior investment adviser Jed Richards said CBA had been the best-performing bank when it came to management.

“However, the share price has reacted excessively, we think, relative to the other banks,” he said.

“The market is paying a massive premium for CBA because of their best-of-breed management.

“Our recommendations are working off fundamentals, not just management, and we are working towards reducing CBA and replacing it with other banks.”

Shaw preferred exposure to Westpac and ANZ, Mr Richards said.

He said bank shares offered little growth potential as “they are so hamstrung by regulations these days”.

Bell Direct market analyst Grady Wulff says CBA’s profit result in February will be watched.

“There’s no growth in banks – therefore you have to rely on the dividend, and CBA’s dividend is a lot less than the others.

“PEs historically have been around 14 per cent for the major banks.”

Bell Direct market analyst Grady Wulff said investors looked for safer options in 2023 and CBA’s performance highlighted peoples’ confidence and trust in the company.

“CBA is also Australia’s largest home lender, having funded $149bn in new lending during FY23 despite headwinds faced in the sector,” she said.

Ms Wulff said despite many analysts rating CBA a sell at the moment, it continued to defy market expectations.

“All eyes will be on this big bank come reporting season in February,” she said.

“CBA has the potential to rally. However, it is considered expensive, and its results set to be released in February will be a key indicator as to the direction of the share price as to whether the analysts are right in saying it is overvalued, or whether market sentiment in the current price is correct.”

Analysts at Goldman Sachs in a report last week say banks have an uncertain outlook and are unlikely to see a significant lift in returns. Goldman Sachs says ANZ and NAB are best positioned for the year ahead, marking the two banks as a ‘‘buy’’. Bank of Queensland was slated as a ‘‘sell’’.