Australia’s top bank CBA lures funds exiting China despite profit outlook

AUSTRALIA’S largest financial institution, Commonwealth Bank, is predicted to report a small drop in first-half revenue this week, however that hasn’t deterred traders from pouring into its shares and turning it into one of many world’s costliest banks.

The inventory has jumped greater than 20 per cent since November, outperforming a 12 per cent rise within the wider market, with the assistance of traders fleeing China’s battered markets and people switching to equities on expectations of rate of interest cuts.

As the market’s second-largest inventory, it’s benefiting from an outsized share of the cash pouring into Australian equities from house and overseas, say analysts and traders.

As a end result, Commonwealth Bank is now buying and selling simply off its all-time excessive, valuing it at 21 occasions ahead earnings per share, or almost double Wall Street big JPMorgan’s earnings a number of and greater than triple HSBC’s.

Its market capitalisation is now roughly double its nearest rival, National Australia Bank.

For traders fleeing China’s stuttering market amid a chronic property disaster and in search of protected, liquid locations to place their cash, Australian banks, and specifically CBA as the biggest and most well-known, are a simple decide, mentioned Matthew Haupt, a portfolio supervisor at Wilson Asset Management.

“Australian banks have been massive beneficiaries of the pull-back from China,” he mentioned. “As people reduce their MSCI Asia exposure, Australian banks are an obvious choice.”

Lofty valuation in danger

However, for many analysts, amongst whom the common value goal for CBA is A$91, or 22 per cent beneath Friday’s (Feb 9) shut, the current rally has lengthy outstripped fundamentals.

When it releases outcomes on Feb 14, CBA is predicted to report a first-half money revenue of A$4.973 billion (S$4.36 billion), down 3.7 per cent from a yr earlier, in response to the Visible Alpha consensus cited by UBS.

The decline is usually right down to a better efficient tax price and the sale of its Indonesian banking unit, though curiosity margins are additionally shrinking, Barrenjoey fairness analyst Jon Mott mentioned in a be aware earlier this month.

“We do not believe such extreme multiples are sustainable given these earnings headwinds,” he mentioned. “The result may be a catalyst for a share price correction.”

Margins are in focus as Australia’s prime lenders look to shore up positions within the extremely aggressive mortgage market.

Investors are additionally alert to how one or two price cuts by the Reserve Bank of Australia anticipated later this yr may additional strain curiosity margins.

Heavy funds movement to CBA

Actively managed funds elevated their allocations to CBA in direction of the top of 2023, in response to knowledge from fund movement tracker EPFR, the one Australian financial institution to see development throughout that interval.

Over that interval, the proportion of institutional and offshore traders holding CBA rose to their highest ranges on data going again to 2013, in response to CBA knowledge.

CBA has additionally nabbed an outsized chunk of the passively managed cash flowing again into Australian equities since November, in response to Citi analyst Brendan Sproules.

Investors added simply over A$5 billion to passive Australian fairness merchandise in November, greater than the remainder of the yr mixed, in response to ASX knowledge.

“For every $10 flowing to passive products, nearly $1 by default goes to CBA,” Sproules mentioned within the be aware.

However, not one of the 14 analysts masking the inventory advocate shopping for it, in response to LSEG knowledge, a probably poor signal for all of the traders who’ve poured in.

“Even lemmings find their cliff eventually, and they don’t realise it until they’re falling,” Sproules mentioned. REUTERS