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”.

Maybe. Maybe.

But probably?

Probably not.

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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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.

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