Top broker says the Commonwealth Bank (ASX:CBA) share price is still overvalued

This banking giant's shares may be expensive according to one leading broker…

| More on:
A share market investment manager monitors share price movements on his mobile phone and laptop

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Commonwealth Bank of Australia (ASX: CBA) share price was well and truly out of form on Monday.

The shares of Australia's largest bank dropped a sizeable 5.7% to $98.06.

Why did the Commonwealth Bank share price tumble?

The Commonwealth Bank share price came under pressure on Monday after broad weakness in the banking sector offset the release of a positive announcement relating to another divestment.

In respect to the latter, the banking giant has signed an agreement to sell its general insurance business to underwriter Hollard Group for $625 million. It also includes undisclosed deferred payments that are payable upon achieving certain business milestones.

Furthermore, the agreement will see additional investment from Hollard throughout a 15-year strategic alliance to drive innovation and enhance the customer experience. Commonwealth Bank will also continue to earn income on the distribution of home and motor insurance products.

Should investors buy the dip?

Despite the sizeable pullback in the Commonwealth Bank share price on Monday, one leading broker doesn't believe investors should be jumping in just yet.

According to a note out of Morgan Stanley, its analysts have retained their underweight rating and $89.50 price target on its shares. Based on the latest Commonwealth Bank share price, this price target implies potential downside of ~11% over the next 12 months.

The broker estimates that the deal with Hollard will boost its CET1 ratio by an estimated 9 basis points and expects it to support a $5 billion share buyback in August.

However, even after factoring this buyback into the equation, it isn't enough for Morgan Stanley to become more positive on the bank. It notes that the company's shares are trading on record high multiples and believes there is a better option for investors among the big four.

That option is Westpac Banking Corp (ASX: WBC). Earlier this month the broker put an overweight rating and $29.20 price target on its shares. This implies potential upside of ~10% over the next 12 months.

James Mickleboro owns Westpac shares. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

A young woman lifts her red glasses with one hand as she takes a closer look at news about interest rates rising and one expert's surprising recommendation as to which ASX shares to buy
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

Man with rocket wings which have flames coming out of them.
Broker Notes

These ASX 200 shares could rise 40%+

Big returns could be on offer from these shares according to analysts.

Read more »

a man in a business suite throws his arms open wide above his head and raises his face with his mouth open in celebration in front of a background of an illuminated board tracking stock market movements.
Broker Notes

Analysts say these ASX shares are top buys in June

Brokers are urging investors to buy these shares. Let's find out why.

Read more »

A man in trendy clothing sits on a bench in a shopping mall looking at his phone with interest and a surprised look on his face.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Woman and man calculating a dividend yield.
REITs

What price target does Macquarie have on Goodman Group shares?

Goodman Group posted an interesting set of numbers in Q3. Here's Macquarie's take.

Read more »

Miner looking at a tablet.
Broker Notes

Why Macquarie expects this ASX 200 copper stock to surge 36% in a year

Macquarie forecasts some hefty gains ahead for the ASX 200 copper miner. But why?

Read more »

two women celebrating good news on phone
Broker Notes

Top broker names 3 ASX All Ords stocks with between 30% and 77% upside

These 3 stocks offer compelling potential upside.

Read more »

Woman on her phone with diagrams of tech sector related elements linking with each other.
Broker Notes

A leading fund manager is buying these ASX 200 tech shares

Let's see why the fund manager has these shares in its focus portfolio.

Read more »