Across three decades the market has valued Commonwealth Bank (CBA) at a premium relative to its three peers. Whether we look at earnings, dividends or book measures of valuation, CBA has consistently traded at a 15-20% premium since the 1990s.
CBA's premiums are currently 2-3x higher than what we have seen over the past 20 years. Analysts across the market cannot make sense of this expanded premium, which began to emerge in 2019. CBA today is the only Refinitiv consensus Sell-rated (since August 2020) bank amongst the big four. And it goes further, with CBA having more analyst Sell ratings than all three peer banks combined.
Whilst CBA’s premium valuation seemingly defies gravity; there are valid reasons to suggest a premium rating is warranted. CBA’s higher return on equity, dominant retail bank, technology leadership, and a track record of a more consistent operating performance are all valid reasons.
The key question remains, why is this premium higher than at any other time in CBA's history? We have recently reduced our bank sector call to underweight, given a more balanced prospect between earnings growth and valuation. In this report we examine:
- Three reasons behind CBA’s premium rating
- Arguments for CBA’s expanded valuation premium
- Is CBA’s premium rating sustainable?
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Written by
John Lockton, Australian Equities
John is a leading investment strategist with 20 years experience.