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By Sameer Manekar
(Reuters) - Commonwealth Bank of Australia's strong asset quality is expected to help the lender deliver marginal cash earnings growth in the first half, though analysts believe its lofty valuation seems untenable amid rising macroeconomic headwinds.
Shares in CBA, Australia's biggest bank, have soared nearly 70% since November 2023 when the central bank lifted interest rates to a 12-year-high, propelling the stock to trade at more than 26 times its future earnings with a 4.1% dividend yield.
In comparison, an MSCI gauge of world banks, in which JPMorgan, Bank of America, Wells Fargo and Citigroup hold an aggregate 34% weight, is trading at 11 times future earnings with a 3.65% dividend yield.
But that has not deterred investors in Australian banks, particularly CBA. They have provided a perceived safe haven with their strong fundamentals and attractive returns, at a time when the resources sector, traditionally more dominant of the two, struggles with muted commodity demand from China.
"Australian banks despite being low growth continue to offer stable and predictable earnings/dividends," UBS analysts said.
The lender is widely expected to report flat to low single-digit growth in cash net profit on Wednesday, as per analyst consensus, with a slight uptick also forecast in net interest margin and common equity tier 1 capital - key metrics of profitability and spare cash.
"CBA looks set to benefit from strong management execution, a reputation as a 'safe haven' within the banks and better credit quality from its larger skew to retail banking," Citi analysts wrote in a note.
But while earnings may prove resilient, CBA's high trading multiples might be at risk from an easing in monetary policy and trade jitters, analysts say, with rotation back into miners - now trading at significant discounts - further threatening its frothy valuations.
"The anticipated RBA (Reserve Bank of Australia) rate cut could compress net interest margins, challenging profitability even if lending increases," said Junvum Kim, senior sales trader at Saxo Asia Pacific.
"If banks struggle to justify high valuations, investors might rotate into mining, where strong commodity prices could offer better returns," Kim said, adding trade war jitters and unexpected regulatory changes could further affect earnings.
The other three of the "Big Four" lenders: National Australia Bank (NAB), Westpac, and ANZ Group are on a different reporting schedule than CBA and will issue limited first-quarter trading updates next week.
All of the banks are expected to report little to no growth in their net interest margins, with NAB forecast to report a marginal drop in its first-quarter cash earnings.
(Reporting by Sameer Manekar in Bengaluru; Editing by Jamie Freed)
