Shares in Commonwealth Bank of Australia (ASX: CBA) traded lower again Thursday, but an uncertain earnings outlook and premium relative valuation suggest it may be too early to buy back into the stock right now.
Coupled with a poor third-quarter result and analysts downgrading earnings forecasts for the bank, there appears to be better value elsewhere in the banking sector right now.
One reason for the cautious view is Commonwealth Bank's P/E premium to peers, with many market watchers saying this is unwarranted given ongoing regulatory concerns and a modest earnings per share outlook.
According to Reuters estimates, Commonwealth is trading on a P/E of 13.4 times, compared to just 11.7 times for Australia and New Zealand Banking Group (ASX: ANZ), 12.6 times for Westpac Banking Corp (ASX: WBC) and 13.3 times for National Australia Bank Ltd. (ASX: NAB).
Macquarie is one broker that argues the P/E premium is difficult to justify. It maintained its "Hold" recommendation on the stock and said Commonwealth Bank faces "ongoing challenging trends and uncertainty around the level at which earnings are likely to settle".
The broker also says the bank is likely to step up provisions in the fourth quarter as it provides for the expenses that will arise from APRA's enforceable undertaking which was issued at the beginning of May.
Morgan Stanley is even more cautious, retaining an "Underweight" rating on Commonwealth Bank. It says that its previous prediction of an ongoing derating of the stock is now playing out, due to a moderation in the bank's growth and return profiles.
The broker is forecasting no EPS growth between FY15 and FY19E and the bank's return on equity falling from around 18% to around 14.5% over the same period. It is also predicting slower home loan growth, downside risk to margins, ongoing conduct concerns, an earnings hole from asset sales, and some strategic uncertainty.
One of the key factors is the ongoing uncertainty over costs due to the bank's compliance and regulatory burden, with the broker saying while it is forecasting business as usual cost growth of around 2% this year, provisions for regulatory and compliance costs are likely to lift total expenses by around 5.5% year-on -year.
UBS agrees on this, saying regulatory risks remain very high and says it does not believe the costs relating to APRA's enforceable undertaking will be one-off in nature.
"Further, we believe it may be challenging for CBA to undertake a material cost-out strategy to offset revenue pressure while going through these EU processes," it said in a report.
The broker maintained its "Hold" recommendation given the challenging outlook for the bank and risks being skewed to the downside.
