Why this top broker thinks the CBA (ASX:CBA) share price is overvalued

ASX expensive defensive shares man carrying large dollar sign on his back representing high P/E ratio or dividend

The Commonwealth Bank of Australia (ASX: CBA) share price has rallied 24% year-to-date and held up relatively well amidst the seasonally volatile months of September and October.

CBA shares have mostly traded sideways since June this year, with the exception of a few sharp pullbacks taking place during mid-June and mid-August (ex-dividend).

As the CBA share price continues to consolidate around the $100 level, investors eagerly want to know whether it will break towards the upside or downside.

In an interview by Livewire, Head of Equities at Tyndall Asset Management Brad Potter, called out CBA as being far too expensive compared to its peers.

Why this broker isn’t excited about the CBA share price

More broadly speaking, Potter is overweight on the banking sector.

He notes that dividend yields have bounced back to the 5% level, which he believes is sustainable for the short-to-medium term.

He believes that the strong capital position of banks will enable them to deliver shareholder value through buybacks and dividends.

In the case of CBA, it just completed a $6 billion off-market buy-back last Monday.

Despite an overall bullish view on the banking sector, he flagged that banks may struggle to maintain growth amidst a low interest rate environment which could pressure net interest margins.

Potter also believes that the CBA share price is far too expensive relative to its peers.

As it stands, the CBA share price trades at a premium price-to-earnings relative to the other big four peers.

CBA shares currently trade at a price-to-earnings of around 21. By comparison, the other big four banks sit between 13 to 16.

Commenting on the premium, Potter said:

We assume a 15% premium for CBA versus the other banks in our process, but it’s actually trading at a premium of more than 30% to the other banks. We think this is excessive as we don’t see top-line growth being any better for CBA than the other banks.

The CBA share price closed 0.05% lower on Monday to $104.42.

The post Why this top broker thinks the CBA (ASX:CBA) share price is overvalued appeared first on The Motley Fool Australia.

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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