Why these brokers think that the CBA (ASX:CBA) share price is a sell

Key points

• Some brokers reckon that the CBA share price is a sell, thinking it’s going to drop this year
• The bank may be facing income pressure in the first half of FY22
• CBA is expected by some brokers to pay a grossed-up dividend yield of 5.8% in FY22

The Commonwealth Bank of Australia (ASX: CBA) share price has dropped around 10% since the start of the 2022 calendar year. But some brokers think that there are more declines to come.

Historically, CBA shares have been priced more expensively than the other ASX banks of Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

But some brokers like Macquarie and Morgans believe that the CBA share price valuation is too high.

Sell calls on the CBA share price

Morgans rates CBA as ‘reduce’ and Macquarie thinks that CBA is going to ‘underperform’.

Macquarie reckons that CBA is going to fall around 5% over the next 12 months, with a price target of $88.50. After looking at how US banks performed, the broker thinks there is a risk of a drop of market income in HY22.

Morgans is much more pessimistic about the prospects of the CBA share price, with a price target of just $74. That would be a drop of more than 20% over the next 12 months. This broker is expecting CBA to generate half-year cash profit of $4.3 billion and pay an interim dividend of $1.74 per share.

Full year estimates

Looking at the broker’s estimates for FY22, Macquarie thinks that CBA is valued at 20x this year’s projected earnings. Morgans’ numbers put the bank at 18x FY22’s estimated earnings.

Turning to the dividend, which plenty of retail investors like CBA for, Macquarie thinks Australia’s biggest bank will pay a grossed-up dividend yield of 5.8% in FY22 at the current CBA share price. Morgans’ estimate is very similar, with the broker having a forecast grossed-up dividend yield of 5.8% from the bank.

Latest insight into profitability

The best insight that investors can get is what the bank itself says. In November 2021, the bank reported how well it did in the three months to 30 September 2021.

In that quarter, it generated statutory net profit of $2.3 billion and cash net profit of $2.2 billion. Reported continuing cash net profit was up 20% year on year, but down 9% against the FY21 second half quarterly average. Pre-provision profits were “stable”.

Income was down 1%, with above system volume growth helping to offset continued margin pressures and lower non-interest income. The net interest margin (NIM) was “considerably lower” because of higher liquid balances, home loan price competition and customers switching to lower margin fixed rate loans, as well as the continued impact of a low interest rate environment.

Looking at the costs, operating expenses (excluding remediation costs) were actually 3% higher, mainly due to higher staff costs from lower annual leave usage during the lockdowns.

CBA share price snapshot

Whilst CBA shares are down 1% today and around 10% this year, it still registers a gain of approximately 7% over the last 12 months.

The post Why these brokers think that the CBA (ASX:CBA) share price is a sell appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison 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 recommended Macquarie Group Limited and Westpac Banking Corporation. 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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