CBA

Even though the market has, at long last, firmly turned attention to anything other than banks and iron ore, it is still worth noting that CBA is very, very expensive.

Note the fairly tight relationship between ROE, amongst global tier 1 banks, and valuations, here Price to book. This is no surprise, ROE is convertible into P/B with the following transformation (RoE – g / CoE – g).

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There is one fairly notable outlier, in the above. Recall that all the arguments about “why CBA is a better bank” relative to peers, eventually has to collapse to some observable measure about fundamentals.

Better credit underwriting standards? Sure, lower loan losses, therefore higher profits after loan loss provisions, a translation of a statement into a fundamental. Better technology driving market share growth? Sure, high revenues, lower opex, better cost to income ratios, a translation of a statement into a fundamental.

Eventually, all points of differentiation have to come through in the margins, the asset turn, the leverage, or the discount rates applied, and here is doesn’t seem, to our mind, to be anything to do with the first 3.

Note also, shown below, that some of the more obvious drivers of a banks’ share price (loan growth, the returns to maturity transformation, proxied here by the term spread) are also at levels that strongly suggest some reasonable degree of reversion to the mean.

And we think that makes for a somewhat unattractive investment proposition.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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