When it comes to the banking sector, Commonwealth Bank of Australia (ASX: CBA) shares are a popular option for investors.
And it isn't hard to see why. Thanks to its position as the nation's largest and most dominant bank, CBA's shares have outperformed the rest of the big four by a decent margin over the last decade.
During this time, its shares have generated a respectable average annual total return of approximately 7% per annum.
This would have turned a $10,000 investment into almost $20,000 today.
But where are the banking giant's shares going from here? Let's see what one broker thinks.
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Where next for CBA shares?
According to a recent note out of Citi, its analysts are not feeling overly positive about the bank's shares.
Due partly to their belief that net interest margins (NIMs) are now on a downward trajectory, the broker has put a sell rating and $82.50 price target on its shares.
Based on the current CBA share price of $99.62, this implies a potential downside of approximately 17% for investors over the next 12 months.
What did the broker say?
Citi recently boosted its earnings estimates and valuation to account for a couple more rate increases from the Reserve Bank. But even after doing this, it still feels that NIMs are heading lower due to mortgage competition.
In light of this, the broker doesn't appear to believe that CBA shares deserve to trade at such a premium to the rest of the big four. It explains:
We upgrade cash earnings by +5%/+8% for FY24/FY25E as we raise NIM assumptions by+ 6/+9bps. With RBA turning increasingly hawkish in the last two months, Citi Economics team forecasts two additional 25bpts cash rate hikes from current 4.1% level to reach terminal rate of 4.6% by Aug-23. Rate cuts are expected to begin early next year to reach 3.35% by Jun-24.
Reflecting this, we revise our NIMs assumption to account for benefit from at-call deposits re-repricing as well as replicating portfolio (as yield curve moves up). This is slightly offset by increased deposit beta and elevated at-call-to-TD switching, as deposit competition becomes more intense. Overall, our half yearly NIMs follow a decreasing trajectory, reaching 1.92% by 2H25E from current 1H23 2.10%, with asset (mortgage) competition offsetting the liability benefits.
