(Bloomberg) — Equity analysts can’t seem to figure out Commonwealth Bank of Australia.
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It’s the only bank in the world worth more than $100 billion that has zero buy recommendations. Yet the stock has surged 37% since it lost its last positive rating in August 2022, reaching a succession of record highs and outperforming gauges of peers.
Australian banks have benefited from an inflow of cash pouring out of miners amid an uncertain outlook for global demand. CBA has gotten the greatest share as the nation’s largest lender, though the bearish analyst chorus highlights how this has also made it the world’s most expensive megabank stock.
“CBA is in mesospheric territory,” Jefferies Financial Group Inc. analyst Matthew Wilson wrote in a note this week. “At some stage a violent switch back/u-turn out of banks is likely.”
Now worth about $160 billion, CBA overtook slumping BHP Group Ltd. in July as Australia’s most valuable company. That’s led to greater buying of the lender’s shares by passive funds that track the capitalization-weighted S&P/ASX 200 benchmark. A CBA spokesperson declined to comment for this story.
Goldman Sachs Group Inc. concedes it has been wrongfooted by the stock’s gains since it downgraded CBA to sell in 2019. It says the shares were helped by the Australian bank’s more conservative risk settings during the pandemic and its high percentage of ownership by individuals amid the shift to more passive investing.
The advance has been due more to such factors than fundamental performance, analyst Andrew Lyons wrote in a report dated Sept. 12, adding “we believe it is difficult to mount a case where CBA outperforms from here.”
CBA lags on metrics including profits. Its earnings per share are projected to grow 3.5% over the next 12 months compared with 19% at US megabank Citigroup Inc. and 7.6% at Bank of America Corp.
With sluggish earnings coinciding with the share price surge, CBA’s valuation has climbed above all of its major global peers’. The Australian lender’s stock is trading at 23 times expected profits, more than double the levels at Citi and Bank of America.
The high valuations have some betting on a decline. Hedge fund Regal Partners Ltd. recently took a short position in shares of CBA, saying they are too pricey. Bloomberg Intelligence notes that the stock fell at least 46% following the two previous occasions when its forward price-to-book ratio reached its current level of 3.1x.
Miners, meanwhile, are looking more attractive with stocks from BHP to Rio Tinto Ltd. down by double-digit percentages this year. Morgan Stanley earlier this month upgraded BHP to overweight after two years at equal-weight, citing stabilization in iron prices and capex while risks appear to be priced in.
While the Reserve Bank of Australia keeping rates at a 12-year high is positive for the nation’s lenders, it is expected to begin easing in February. At the same time, global investors continue to watch for signs that China’s efforts to shore up the weakest parts of its economy will restore a key global growth engine.
Australian bank stocks have “been a huge beneficiary of all these passive flows” seeking out parts of the market that aren’t exposed to the China, said Jun Bei Liu, a hedge fund manager at Tribeca Investment Partners Pty. “I actually do think that we found the bottom for miners,” which should rise into the end of the year as investors rotate back out of banks, she said.
–With assistance from Harry Brumpton.
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