On February 11, Reuters reported that Commonwealth Bank of Australia's strong asset quality is anticipated to support the lender in achieving slight growth in cash earnings in the first half. However, analysts are skeptical about the bank's high valuation, especially considering the increasing macroeconomic challenges.
CBA, the largest bank in Australia, has seen its stock rise by almost 70% since November 2023 when the central bank raised interest rates to a 12-year high. This surge has led to the stock trading at over 26 times its projected earnings, with a 4.1% dividend yield.
In comparison, a global banking index, including JPMorgan, Bank of America, Wells Fargo, and Citigroup, is trading at 11 times future earnings, with a 3.65% dividend yield.
Despite these concerns, investors, particularly in Australian banks like CBA, view them as a safe investment option due to their solid fundamentals and attractive returns, especially amidst softening demand for commodities from China.
Australian banks, while considered low-growth, are noted for their steady and forecastable earnings and dividends, according to UBS analysts.
Analysts expect CBA to announce flat to low single-digit growth in cash net profit, coupled with a slight increase in key metrics like net interest margin and common equity tier 1 capital during the forthcoming earnings report.
Citi analysts believe that CBA is well-positioned to benefit from strong management, its reputation as a safe investment within the banking sector, and its focus on retail banking, which contributes to better credit quality.
However, analysts caution that CBA's high trading multiples could be at risk due to potential monetary policy changes and trade uncertainties. There is a possibility of investors shifting focus back to mining stocks, currently trading at discounted prices, which could threaten CBA's rich valuations.
Furthermore, an expected rate cut by the Reserve Bank of Australia might challenge profitability by narrowing net interest margins, impacting lending returns. Uncertainties arising from trade tensions and regulatory shifts could also influence earnings.
The other three prominent Australian banks: National Australia Bank (NAB), Westpac, and ANZ Group, are on a separate reporting schedule and are set to provide limited first-quarter trading updates next week.
It is anticipated that all these banks will report minimal growth in net interest margins, with NAB projected to show a slight decline in its first-quarter cash earnings.