CBA share price: Jeffries turns bullish before FY21 results

‘CBA trading premium [and its] negative broker rating skew has not stopped CBA outperforming.’

  • CBA continues to trade at a premium to its big four peers
  • Jefferies recently upgraded the bank from Neutral to Buy
  • The bank has outperformed ANZ, WBC and NAB over the last 1 and 6-month time horizons
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The Commonwealth Bank of Australia (CBA) has long traded at a premium to its big four peers. Some have argued this is justified: CBA has strong management and a history of operational excellence. And as Jefferies analysts recently put it:

‘CBA trading premium / negative broker rating skew has not stopped CBA outperforming.’

Others have argued that the valuation gap is too stark – that a course correction may be inevitable.

Shifting views

Jeffries recently changed their tune, upgrading CBA from Neutral to Buy following a period of underperformance. This comes as the bank is poised to release its hotly anticipated full-year (FY21) results on 11 August.

The consensus is for the biggest of the big four to report cash earnings of $8,459 million and declare a final dividend of 189 cents per share.

Jefferies is broadly ahead of consensus, expecting CBA to report earnings of $8,485 million and a dividend of 200 cents per share.

The investment bank’s thesis is underpinned by an appeal to quality when compared to other banks in the sector. Some of the key points to support this Buy thesis include: CBA’s tight share register of loyal retail investors, the fact that the bank has continued to operationally outperform its peers, and that the bank's capital position was also above peers.

Jefferies analysts went on to say that:

‘While many question CBA premium it has a stronger shareholder value generation profile than peers and is positioned to exploit franchise disruption as WBC and ANZ pursue aggressive cost reset agendas.’

CBA share price performance comps

The Commonwealth share price has outperformed its big four peers over the last 1 and 6-month horizons. See the table below:

Bank

One month performance

Six month performance

Commonwealth

-0.05%

+16.38%

Westpac

-5.10%

+13.68%

ANZ

-1.95%

+12.36%

NAB

-1.82%

+7.46%

Trade CBA here.

Revisiting the past

Looking back at the bank’s most recent quarterly, CBA reported strong growth across a number of key metrics.

The key here was impressive earnings growth: The bank said its third quarter earnings (unaudited cash NPAT) were 24% ahead of the H1 average, coming in at $2.4 billion for the period.

Elsewhere, the bank said expenses edged higher, up 1%, while the bank's 'loan impairment expensive was significantly lower in the quarter' as a result of better economic conditions. It will be interesting to see any commentary at the upcoming FY21 release around that trend reversing – with the recent lockdowns across Sydney and Melbourne – causing concerns of weakening economic conditions.

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