Thinking about a client query on CBA.
We prefer ANZ and WBC, mainly on valuation grounds.
CBA is absolutely the “better bank”, which is reflected in an ROE that is much higher than domestic peers.
However, the key question is “how much more expensive should CBA be, given this higher quality”.
And ROE, as a shorthand here for quality, gives us an insight into how to tackle the question.
Simply plot out all the forecast ROEs, against all the P/Bs, and see if there is a discernible relationship.
And then compare CBA to that implied line of best fit.
Now, you might think “ahah, that’s incomplete, you are not capturing other things that justify the premium”.
It is unlikely that CBA is truly the world’s greatest bank, and by such a wide margin, that the above graph holds.
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