Matthew Davison
Matthew Davison, Portfolio Manager at Martin Currie Australia has cautioned that Commonwealth Bank of Australia’s (CBA) recent upgrade cycle may be drawing to a close, despite the bank continuing to post robust results.
“CBA is still delivering solid performance with modest growth, but sequential momentum is weakening as cost and reinvestment pressures offset stable margins and strong loan growth,” he said. “The return on equity (ROE) and growth trends remain disconnected from the current valuation.”
The latest result came broadly in line with consensus expectations, with no major surprises. “We saw a small beat on trading income, but this was offset by higher costs. There were no shocks on asset quality. Investment spending is running higher, particularly in AI – something that will be seen as a positive by some investors.”
However, he remains cautious on the stock’s outlook. “We would consider this stock as a ‘sell’ / hold underweight. CBA trades at a significant premium to our valuations and to its key peers – nearly 4x price-to-book and 29x price-to-earnings. This premium is disconnected from the ROE and growth trends we see in these results and has been disproportionately driven by passive flows.”
“Net interest margins (NIMs) are stable for now, but deposit competition is intensifying, and the tailwind from prior interest rate rises is fading. Over time, valuations remain very vulnerable to any shift in sentiment around credit risk – something that would also affect risk-weighted assets and credit charges. History suggests there’s also a risk that liability margins worsen.”
And current valuations are stretched. “We’d rate the market at a 4 on a scale of 1 to 5 for expensiveness. Value spreads are relatively wide. We haven’t had a strong bias on earnings revisions given the decent economic data and rate cut expectations lifting some cyclical activity. We see value as stock-specific rather than sector-wide, with attractive names in insurance, contractors, iron ore, energy and travel.
“Looking ahead prevailing valuations remain the key concern. Underlying earnings appear to be trending sideways under persistent cost pressures, and credit charges will eventually rise, pulling down reported profits. While NIMs are stable for now, deposit competition is building and the benefits from earlier rate rises are easing.
“Within the Banks, we prefer ANZ. ANZ still trades at a discount to peers largely due to sentiment rather than fundamentals, and we think the new CEO has the opportunity to improve cost discipline and close that gap.”