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CBA share price flirts with all-time highs before FY21 results

As the bank’s full-year earnings loom, we look at some of the most important considerations driving the narrative behind the stock.

Excellence got us here, but will excellence be enough to keep up there.

At the time of writing, the Commonwealth Bank of Australia (CBA) traded at $105.51 per share, giving it an implied market capitalisation of $187.8 billion.

The stock has run hot leading into its full-year results, with the CBA share price gaining 3.95% over the last five sessions. That builds on a broader rotation back into Australian banks – with the ASX 200 Financials index gaining an impressive 23.14% year-to-date.

Market duality

Indeed, both CBA the bank and CBA the share price – have both benefited from a number of decisively ‘Australian factors’.

The country’s physical makeup – dominated by but a few dense capital cities – have results in concentrated housing hubs and a seemingly exponential growth in dwelling values. In response, banks have mopped up massive loan books over the last two decades – with CBA leading the way in terms of residential mortgages. The expectation by most is for that dominance to remain fixed.

On the other hand, if Australian investors are drawn to property, they seem equally enamoured by dividends. Over its history CBA has maintained a track record of paying good and consistent dividends. Indeed, even when the pandemic thrashed bank stocks: CBA still paid a 98 cent final dividend, in August 2020.

The bank was also quick to return to ‘normalised’ payout levels – declaring a $1.50 interim dividend during February’s interim results. Citi is expecting CBA to announce a final dividend of $1.95 per share as part of the FY21 release.

Despite its loan book and consistent dividend payouts, valuation – long the spectre over the stock – remains something investors and traders should keep an eye on. The bank trades at a decisive premium to its big four peers, a fact stemming from CBA’s operational excellence, profit performance, ect, as much as its dividend payouts.

Capped upside

Analysts from Macquarie however, see CBA’s valuation as a specific risk for the stock, framed against a set of broader issues for the sector. Here the investment bank recently noted that:

‘While favourable credit growth trends provide upside risk to banks’ earnings, if current trends continue, we expect macroprudential controls to ultimately limit the upside. In the near term, with the macro tide turning, we see risk to the sector’s performance, albeit we recognise relative valuation support and longer-term upside if inflation concerns remerge.’

In light of such risks, Macquarie has an Underperform rating on the bank and a $88.50 price target, suggesting that the investment bank expects further downside from current levels.

Let’s wait and see how this plays out.

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