Most ASX investors would be aware of the mind-blowing trajectory of the Commonwealth Bank of Australia (ASX: CBA) share price over the past few years. CBA shares have been an outstanding performer for more than two decades, rising from under $30 a share back in 2003 to the $155 levels we see today.
However, 2024 was one of the best years in the CBA share price's long ASX history.
Last year saw the CBA share price rise from $111.80 a share to $153.25 after hitting a new record high of $161.70 in October. That's a 37.08% return for 2024.
Given this ASX 200 bank stock's outsized role in any ASX index fund, this was great news for many investors, not to mention the vast majority of working Australians with a superannuation fund.
That's all well and good. But where does it leave the CBA share price now that we're in 2025?
Well, one ASX expert reckons that it is far more likely that the CBA share price will have a rough time in the years ahead than continue on its current trajectory.
That ASX expert is fund manager Firetrail Investments.
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ASX expert: CBA share price might be 30% overvalued
In a recent monthly report to its investors, Firetrail identified the CBA share price, alongside its peers in the banking space, as a major source of risk this year and beyond.
The fundie's base assumption is that the banks will "underperform the market in 2025, but won't collapse". Firetrail stated that "we continue to believe underweight the banks will be a source of alpha [market outperformance] in the years ahead".
For one, the fund manager sees "long-term competitive threats in major business lines" for CBA and the other banks. Saying that, it also anticipates that there "is little to derail earnings" in the year ahead.
As such, it sees more threat to bank share prices from valuation changes:
We don't see downward revisions to earnings from where we sit today. On valuation, we expect a change. Any absolute or relative valuation analysis suggests Australian banks are overvalued.
'Valuation doesn't matter'… until it does.
Firetrail is basing its assumptions on two metrics – the banks' return on equity (ROE), and their price-to-book (P/B) ratios.
Running the ruler over ASX bank stocks
On the first metric, Firetrail notes that the CBA share price's ROE has been falling for a decade. It points out that CBA's ROE was around 16% back in the 2016 financial year but now sits at roughly 14%, where it has stagnated for the past few years.
In contrast, CBA's P/B ratio is now at its highest level in at least the past decade, sitting at 3.5. It was at 3 back in June 2024 and at just 1.9 in June of 2018.
Here's what the fund manager says that ASX investors should take away from all of this:
Our preferred metric is price-to-book versus return on equity (ROE). The higher the ROE, the more the market is willing to pay for an asset. If CBA trades back to something more 'normal', given its fairly muted ROE outlook, you should expect a 30%+ retracement in the valuation at some point!
Of course, it's that 'at some point' that is the important thing to know. As famous economist John Maynard Keyes once allegedly said, "The market can stay irrational a lot longer than you can stay solvent".
However, those with an interest in the CBA share price might still want to go back and see how much they think this bank is really worth.
