Macro Intelligence: are the 'Big Four' banks overvalued or a worthy investment?

Article written by Juliette Saly (ausbiz)

Overvalued?

In this week’s edition of IG Macro Intelligence, we take a look at the “Big Four” Australian banks.

The S&P/ASX 200 financial sector (XFJ) is up 33% year-to-date, mostly driven by a rise in index leader Commonwealth Bank of Australia (ASX: CBA) share price. However, many analysts say the stock, and sector, are overvalued.

The S&P/ASX 200 financial sector (XFJ) market summary

• CommBank

Shares in the Commonwealth Bank of Australia (ASX:CBA) have risen almost 40% year-to-date and are up more than 50% over the past 12 months. That’s versus a gain of around 11% on the S&P/ASX 200 index, which has risen 18.5% over the past 12 months.

CBA shares hit a record high of $160.27 last month and are trading on a price-to-earnings (P/E) ratio of 27.94. The long-term trend for the P/E ratio of Australian stocks is around 15. That means a company trading nearly double that, like CBA, looks very expensive relative to its earnings (or growth) potential.

Most analysts think CBA has run too far, too fast, with the average price recommendation on the stock a 'Sell'. The average target price for CBA is $101.15 according to Refinitiv data, suggesting the stock should fall more than 35% from current levels. However, the technicals tell a different story.

ASX Tradewatch data show CBA is in a strong bullish trend, confirmed by multiple indicators. The 5-day moving average (MA) of the share price is above the 50-day MA, while both the 200-day and 20-day MAs are also trending higher.

Commonwealth Bank daily chart

Analyst opinions on CBA

Yet, Morningstar banking analyst Nathan Zaia told ausbiz, at these levels - it’s a case of buyer beware:

“CBA is very overvalued. I think it's trading around 70% above our valuation. And [...] a lot of people have tried to justify why it deserves to trade at such a premium. But I think looking at any sort of current trading multiples, current earnings forecasts, yeah, we just struggle to see how it can be, you know a P/E of 25 dividend yield of three. We just don't think it's very appealing.”

Nick Morton from Resonant Asset Management is another one confused by CBA’s rise and rise.

“As someone who looks at fundamentals, it's a bit of a head-scratcher, to be perfectly honest. The only way that CBA can really grow earnings from here, in our view, is through cost-cutting ultimately. And you see a lot of Matt Comyn’s pronouncements around the use of AI and chatbots and things like that. So that's the approach they're trying to defend their 25 times multiple, which is a huge amount for a cyclical business like a bank.”

Commonwealth Bank stock performance and analyst ratings

Overvalued but still in demand

CBA is not the only banking stock that has risen sharply in 2024, and Citi analysts are warning the sector could be in for a rough 2025.

Analysts at Citi say valuations in the sector are over-stretched and earnings growth is likely to be muted. They’re warning ASX banking stocks could fall by as much as 30% next year.

UBS head of Australian banks research John Storey is another who thinks the sector is overvalued, writing in a note that “the disparity between valuations (high) and expected returns (low) remains wide, and in our opinion fair value for the banks is around 10.2% lower than current prices.”

Martin Lakos from Macquarie, meanwhile, told ausbiz one reason the banking stocks keep being bid is the switch from institutions into the “Big Four”, despite their expensive valuations.

“Certainly, the institutions look like they have actually been underweight the banks for a while, and quite a few of those institutions are shifting their investment models to a more passive, greater index exposure and being underweight. One of the biggest sectors of the market, they would have to weigh up. And so we're seeing money being allocated into the banks.”

Analyst recommendations and stock performance

• Westpac

Despite some negative views on the overall banking sector, analysts agree some exposure to the “Big Four” is wise. John Storey at UBS has upgraded Westpac Banking Corporation (ASX:WBC) to a 'Buy' rating from neutral, claiming it’s the best of an expensive bunch.

“Expectations for (the sector in) 2025 are not much better,” Storey notes, “however the broader reputation of Aussie banks as predictable and stable remains in place.”

Westpac is currently trading on a P/E of 17.36, and is trading on a dividend yield of 4.54%. Shares have risen 44% so far in 2024, making them the best performer out of the “Big Four.” The average recommendation on the stock is a 'Sell', according to Refinitiv, with a price target of $27.51, a 17% decline from where the stock is currently trading.

Westpac stock performance and analyst ratings

• ANZ

Meanwhile, Morningstar's Nathan Zaia picks Australia and New Zealand Banking Group (ASX:ANZ) as his preferred Big Four stock.

ANZ shares are up about 21% year-to-date and 28% over the past year. Most analysts recommend holding the stock, but Zaia says investors are potentially overly cautious about its Suncorp acquisition.

“I think people are worried about, you know, the integration with Suncorp Bank. They're doing a lot with their actual systems at the moment as well. So there's always risk there when you're integrating cost overruns, just disrupting how customers interact with you. So I think those sorts of risks there may be overpriced a little bit. So in a sector that's overvalued, I think that's probably the one that you know, may be the most.”

• NAB

Finally, when it comes to National Australia Bank (ASX:NAB) shares, technicals show the stock can continue rallying in both the 20-day and 200-day MA timeframes. Most analysts recommend holding the stock, which is up more than 27% year-to-date.

ANZ daily chart