Australia’s largest bank remains a top-quality business, but valuation is still difficult to justify relative to its peers, particularly as the operating environment for the entire sector becomes more challenging.
CBA entered this period trading at a substantial premium to the other major banks, leaving less room for disappointment as housing credit growth softened, competition intensified and the earnings outlook became more subdued. Given CBA is also Australia’s largest mortgage lender, it has greater exposure to the slowdown in home lending volumes than its peers.
That combination helps explain why the stock has pulled back more sharply. We don’t see a fundamental problem with the business; rather, an expensive stock has been forced to adjust to a less supportive earnings backdrop.
- We still wouldn’t be surprised to see CBA test the $140 area if the broader market has another leg lower, although we believe much of the valuation reset has now occurred.
MM is neutral to cautiously bullish towards CBA around $154
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