‘Hard to fathom’: analysts wary of surge in bank shares

Analysts and investors say shares in the country’s biggest bank are defying logic as they trade near record highs despite increasing headwinds, amid a surge in bank share prices more broadly.

The latest round of earnings results confirmed the market’s concerns that Australia’s banks are increasingly feeling the squeeze on their profit margins due to fierce competition. Yet shares in the banking sector have pushed higher.

Shares in all four big banks hit one-year highs on Monday, with the Commonwealth Bank reaching a historical peak of $118.12 a share, before the sector retreated slightly on Tuesday.

Shares in the big four have risen by at least 14 per cent in the last six months, as investors have grown more optimistic about the prospect of a “soft landing” for the economy.

Shares in the big four banks hit record highs on Monday, but analysts say they’re generally overvalued.Credit: Karl Hilzinger

It comes after the banks flagged increasing late mortgage repayments and weakening profit margins amid intense competition and higher funding costs.

E&P Capital analyst Azib Khan said the rally in major bank share prices was hard to justify and that it was unlikely that banks would outperform consensus forecasts.

“Prospects of interest rate cuts have seen bank share prices get ahead of themselves,” he said in a recent note. “While rate cuts may well prove beneficial for bank earnings, [future earnings forecasts] already appear quite optimistic.”

However, Khan said there may not be a fall in net interest margins – a measure of profitability comparing banks’ funding costs with what they charge for loans – if banks chose not to pass on rate cuts in full to home loan borrowers.

Morgan Stanley equity analyst Richard Wiles said the major banks’ price-to-earnings multiples – a comparison of their share prices and how much analysts expect them to earn over the next year – were at record highs and that while banks’ recent results showed stable operating trends, they didn’t include any major surprises.

“In our view, the major banks did not deliver the material upgrades to earnings, dividend or buyback expectations necessary to support current multiples,” he said, noting CBA’s dividend yield had fallen below the Reserve Bank’s cash rate for the first time since the global financial crisis.

Novus Capital senior client adviser Gary Glover said it was “hard to fathom” why people were continuing to buy shares in CBA, especially given its low yield and consensus expectations for earnings to remain flat over the next year.

However, despite bank share prices sitting “way beyond” broker targets, he said there was also a tendency for market leaders to rally during a bull market. “When money takes off, it tends to go to market leaders,” he said.

Citi analyst Brendan Sproules noted the country’s biggest bank, CBA, was growing more slowly than other banks. While CBA is trading at the biggest premium to its forecast earnings, Sproules said the bank was growing at a weaker rate. Of 16 analysts covering CBA on Bloomberg, there are no buy ratings on CBA shares.

“In mortgages, it continues to grow below system,” Sproules said. “In business lending, it seems to be doing even worse and registering not even half of its peers’ growth. Furthermore, it is losing market share to Macquarie, which has recently announced its ambitious business banking strategy.”

In the six months to January, CBA grew its business lending portfolio by 3.7 per cent compared with the other major banks which grew at about 8 per cent, and Macquarie which grew at 10 to 15 per cent over the same period.

Sproules noted CBA was also underperforming in household deposits, which has been a historical area of strength for the bank.

Jefferies equity analyst Matthew Wilson said in a recent note that CBA’s valuation looked unsustainable and that its share price rally was likely partly attributable to an inflow of funds from passive investors.

“We think large swathes of passive money (also avoiding China) has distorted the fundamentals,” he said, noting the impact of passive investing, such as index funds and exchange-traded funds (ETFs), tended to have a disproportionate effect on the market and sector-leading companies.

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