Commonwealth Bank enters ‘bear territory’ but Aussies warned as risk remains: ‘It doesn’t make sense’
The share price of Commonwealth Bank has finally shows signs of facing reality. (Source: Yahoo Finance/Getty)
Commonwealth Bank, or at the very least its share price, has left many analysts scratching their heads in recent times. The lender’s stubbornly high valuation after surging to eye-watering heights in the years after the Covid pandemic has meant it makes up an astonishing high portion of the Australian stock index.
It’s a situation that has consistently left the professional investor class perplexed this year. But the bears are starting to roar.
When it comes to CommBank’s stubbornly lofty valuation, “I don’t really think there’s one good answer,” Daniel Deverich, a portfolio manager at Sydney-based Bellmont Securities, told Yahoo Finance.
“Which is why so many professionals are perplexed.”
RELATED
After years of lacklustre earnings growth among the major companies on the ASX, “people have started paying a higher price for earnings growth that they perceived as highly probable,” he told Yahoo Finance.
The constant knock on the Australian market is that it’s about holes (miners) and home loans (banks). And capital flows have followed the latter.
“A lot of the fund managers have to maintain risk controls, and so that means they have to put the money in other large stocks. So they’ve taken it out of miners and put it in banks and CommBank has been the major beneficiary of that.
“It’s always been more expensive than the other banks, but I think in the last couple years, you’ve had this situation where it’s really decoupled from that relative premium,” he added.
In the middle of the year, the company’s share price hit $190 a share, putting it at a price to earnings ratio of more than 33 times – that’s more than fabled US tech stocks such as Google, Meta and Amazon have enjoyed throughout the year.
It was the first ASX-listed company to be valued at more than $300 billion. At the time in June, it accounted for a staggering 12 per cent of the entire value of the ASX 200.
“It’s got a growth-stock style multiple when there really isn’t that growth,” Deverich said.
But as markets wobble, and Commonwealth Bank delivered mixed quarterly results last week, the golden run of the country’s largest lender is finally losing some of its shine.
While the bank bounced at the open on Monday, Tony Sycamore, Market Analyst at IG Australia, noted at the close on Friday that the CommBank share price was a whisker away from entering its own bear market after taking a battering last week.
“CBA poised to finish this week a cool 10.5% lower,” he said on X.
“Additionally, its ~18.8% decline from its $192.00 record high of late June, leaves it just over 1% from falling into bear market territory.”
But even after the sell-off, it still commands a hefty price for a bank (especially by international standards), with a price to earnings ratio above 26 and a market cap of about $265 billion.
As has long been the case, analysts suggest you should have nothing to do with it. Of the 14 analysts covered on MarketScreener currently, 11 of them continue to have a sell rating while the other three believe the stock will “underperform”. No analyst recommends to hold or buy it.
Speaking to Yahoo Finance prior to last week’s sell off, Deverich said the bank’s share price simply “doesn’t really make sense”.
“But there’s a lot of valuations in the market that don’t make sense, but they persist for a long time until there’s some sort of catalyst that up ends that trend,” he said.
The portfolio manager and analyst pointed to another major ASX stalwart as an example of where high valuations pose downside risk to Aussie investors.
“It doesn’t make any sense, it’s a mature company that’s growing in sort of low to mid single digits,” Deverich said.
“So it’s not only CommBank. But CommBank is sort of one of the most perplexing ones.
“I’m sort of hesitant to say high valuations are a new norm … [but] if I knew what the catalyst was, I’d probably be sitting on a beach somewhere.”
He’s far from the only market analyst who remains bemused.
“Constant dip buying in Australian banks will never cease to amaze me,” David Scutt, a Senior Market Analyst at Global Macro, noted this month.
Almost every Australian worker will have some sort of exposure to the share price of Commonwealth Bank, “either directly or indirectly in their super holdings,” Deverich noted.
While there are a number of factors underpinning its stubbornly high valuation, the rules of the superannuation system have also contributed.
“This regulation that was brought in that means the super funds aren’t allowed to underperform a benchmark by a certain amount over a certain time period. And so what they ended up doing over the last few years was covering underweight positions,” he explained.
“I think particularly in Australia, there is a dynamic where there’s almost too much capital for the amount of good companies.
All Aussies – whether they think about it or not – likely have exposure to the bank’s share price. (Source: Getty) ·Getty Images
“There’s too much money relative to the opportunity set,” he said.
Part of that is the emergence of the private sector, with more companies either being taken private or not entering the public markets.
The growth in private equity and the private credit market has arguably limited the opportunities for retail investors.
“In one sense, we’re a victim of our success of the super system, and that’s why you see a lot of money going into the private space and offshore at the moment,” Deverich said.
Writing about the “anomaly” of Commonwealth Bank’s share price last month, he said its very full valuation “has far and wide ramifications for Australian citizens”.
“The probability of everything going right is very low, along with the probability of the valuation being maintained,” he concluded.
