At today's prices the Commonwealth Bank of Australia (ASX: CBA) share price appears a little expensive.
'How can you tell CBA shares appear expensive?' I hear you ask.
One way to get a sense of a company's valuation is to compare it against its peers, or in this case the banking 'sector' more broadly.
In Australia, the banking sector includes the heavyweights like Australia and New Zealand Banking Group (ASX:ANZ), Westpac Banking Corp (ASX:WBC) and National Australia Bank Ltd. (ASX: NAB). It also includes regional banks like Bank of Queensland Limited (ASX: BOQ) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
Here are the stats:
| Commonwealth Bank | Sector Average | |
| Price-earnings ratio (lower is better) | 15 | 13.7 |
| Price-book ratio (lower is better) | 2.33 | 1.34 |
| Dividend yield (higher is better) | 5.1% | 6.1% |
As can be seen in the table above, Commonwealth Bank shares appear expensive using this relative comparison. For example, the price-book ratio (P/B) measures the price of CBA shares against its assets (loans, buildings, credit cards, etc.). Clearly, the market values Commbank's assets more highly than its peers.
Why?
Maybe the market believes Commbank can achieve better returns on those assets and grow quicker (remember this is just a 'point-in-time' valuation). If that's the case, maybe the premium pricing is justified.
However, the valuation stands, and investors must expect more growth from here to justify buying Commbank at this seemingly elevated share price.
Foolish Takeaway
Personally, I think Commbank's shares deserve to be priced at a premium to peers. However, I would prefer to buy in at a lower price than we are being offered today. Below $70 per share would see me to run the ruler over them again.
