Reality bites: Broker warns CBA shares to underperform this week

The relative outperformance of the Commonwealth Bank of Australia (ASX: CBA) share price is under threat could slump this Wednesday.

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The relative outperformance of the Commonwealth Bank of Australia (ASX: CBA) share price is under threat as one leading broker believes the stock will slump this Wednesday.

This is when Australian's largest ASX-listed bank will release its quarterly earnings and update.

The news will be ugly, according to Morgan Stanley, which is predicting a 70% to 80% chance that the stock will fall relative to the S&P/ASX 200 Index (Index:^AXJO) and keep underperforming for next two months.

Cut above the rest

CBA shares have fallen 24% since the start of 2020 as the COVID-19 pandemic rocked the economy, but that's better than the other ASX big banks.

The National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share prices have tumbled by over 30% each.

The three laggards have reported dismal first half profits in the last two weeks, so the bad earnings news from CBA isn't unexpected although that may not be the bank's biggest problem.

Reality check

"We expect a ~30% fall in cash profit, an A$1bn COVID-19 provision and a CET1 ratio of ~11.2%," said Morgan Stanley.

"While the profit decline and higher provisioning are unlikely to surprise investors in the current environment, we think the trading update will lead to less confidence in the capital and dividend outlook."

This will make CBA's market premium harder to justify.

CBA losing its crown

The bank has long held the crown of being the best quality bank on our market and investors are happy to pay a higher multiple for the stock.

For instance, CBA trades on a FY21 forecast price-earnings (P/E) multiple of 15 times and a price-to-book value (P/BV) of 1.5 times, based on Morgan Stanley's estimates.

This compares to the average P/E of 11 times and P/BV of around 0.8 times for its peer group.

Foolish takeaway

This is why the broker thinks CBA is more vulnerable to a de-rating if the cycle deteriorates further, and offers less upside in a rebound scenario.

Morgan Stanley rates the stock as "underweight" (meaning a "sell") with a price target of $57.50 a share.

If you want to find out more about bank valuations and the importance of P/BV, click here to read my weekend article on the cheapest bank on the ASX.

But of course, price and quality usually move in opposite directions. Those willing to pay for a relatively safer stock in the sector may want to consider Macquarie Group Ltd (ASX: MQG) instead – at least until more coronavirus water passes under the banking bridge.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, and National Australia Bank Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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