ASX’s biggest stock is tipped to make $10.3b. Will it be enough for investors?
The hefty share price premium enjoyed by Commonwealth Bank is likely to take centre stage again this week, when the banking giant is expected to report profits of about $10.3 billion for the financial year.
The biggest stock on the sharemarket, CBA has had a stunning rise. The stock has soared 37 per cent in the past year, far more than rivals, as investors piled into the bank’s shares as a way of gaining exposure to Australia’s economy during a time of global volatility.
CBA reports its profits this week, and investors say there’s little margin for error.Credit: Oscar Colman
The surge means CBA’s market value easily eclipses that of its two nearest rivals, Westpac and National Australia Bank, combined. Analysts almost universally say CBA shares are overvalued.
The Sydney-based bank comprises about 12 per cent of the ASX 200, and its result will be a key event for sharemarket investors this week, as well as providing an important bellwether for the local banking sector and the wider economy. Investors say there will be little margin for error for the bank’s results, which will be delivered by chief executive Matt Comyn on Wednesday.
Analysts expect CBA’s first-half profits will increase to about $10.3 billion, up from $9.8 billion last year, and investors are likely to pore over its profit margins and any sign of a worsening in its loan portfolio.
Opal Capital chief investment officer Omkar Joshi said much of the buying of CBA shares, which had inflated the stock price, was not driven by the bank’s performance.
Instead, analysts have suggested the share price has been inflated by super funds and offshore investors buying the stock as a bet on Australia’s economy during a period of global volatility.
Even so, Joshi said that when share prices were high, it meant there was generally less margin for error, adding this was the case across for other highly valued stocks on the ASX as well.
“It needs to have a good result. It can’t afford to have a bad result. But at the same time, the reason it’s going up is not necessarily people chasing it because it’s performed particularly well,” Joshi said.
J.P. Morgan analyst Andrew Triggs said he expected CBA to deliver a “creditable” result compared with rivals. He said its margins had performed better than other banks, partly because CBA is less reliant on mortgage brokers.
CBA this month said it would cut 45 jobs because the work could be completed by artificial intelligence systems, and Triggs said he expected a focus on cost-cutting from the bank. He said positive earnings revisions appeared to be factored into the share price. J.P. Morgan’s view is that CBA’s valuation is “extraordinarily stretched” and that it trades at a “very large” premium to major bank peers.
CBA chief Matt Comyn will deliver the bank’s results on Wednesday.Credit: Oscar Colman
MST Marquee analyst Brian Johnson said the bank had been performing better than rivals, but he also had an “underweight” position, citing its “stretched” valuation.
UBS analyst John Storey, who said CBA’s result was highly anticipated as it was the leading stock on the market, said UBS’s assessments also indicated CBA was “significantly overpriced”.
The rise in CBA shares has been a headache for many professional stockpickers, as many of them were “underweight” on the stock because of concerns it was overvalued.
Having an “underweight” position made it much harder to make returns exceeding those from the ASX 200, given 12 per cent of that index is CBA. This has meant many fund managers had lagged the benchmark indexes against which they are assessed for performance.
Atlas Funds Management chief investment officer Hugh Dive said the rise CBA in shares was “one of the most hated rallies” among fund managers, and that the bank needed to deliver a strong result. “If we see a tick-up in bad debts and a fall in margins, there’s not a lot of room for error,” he said.
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