Would I be crazy to buy CBA shares at $121?

The Commonwealth Bank of Australia (ASX: CBA) share price has soundly outperformed the S&P/ASX 200 Index (ASX: XJO) in the last six months, rising by 17% compared to the index’s 11% increase.

After such a strong run, investors may be questioning whether the ASX bank share can still be a good investment with the price/earnings (P/E) ratio now above 20.

The higher the earnings multiple valuation goes, the more risk there is of overpaying. Valuation itself can be an issue with an investment.

Expert’s rating on CBA shares

Writing on The Bull, Arthur Garipoli from Seneca Financial Solutions has called Australia’s biggest bank a sell.

He gave his verdict after looking at the FY24 third-quarter result which was “marginally better than expected”. Garipoli noted the CBA update reflected “similar themes to its peers”. The expert then said:

We note a decline in net interest margins and lower revenue growth coupled with increasing cost pressures. We acknowledge CBA is the premier bank, but we can’t justify its valuation premium compared to competitors. Investors may want to consider taking a profit.

The quarterly profit generated by the bank was approximately $2.4 billion, down 5% year over year. CBA reported a loan impairment expense of $191 million, with collective and individual provisions “slightly higher”. The bank said its lending portfolio’s credit quality remained “sound”, though there were “moderate increases in both consumer arrears and corporate troublesome exposures”.

Valuation premium compared to other ASX bank shares

There are a few different ways to value a business, with the P/E ratio being one of the easiest methods.

As mentioned above, CBA shares are trading on a much higher earnings multiple than peers. According to the (independent) forecast on Commsec, the CBA share price is valued at 21x FY24’s estimated earnings.

Now, let’s compare that to the other major banks using the forecasts on Commsec.

The ANZ Group Holdings Ltd (ASX: ANZ) share price is valued at 12.6x FY24’s estimated earnings.

The Westpac Banking Corp (ASX: WBC) share price is valued at 14.5x FY24’s estimated earnings.

The National Australia Bank Ltd (ASX: NAB) share price is valued at 15.4x FY24’s estimated earnings.

Based on those numbers, CBA’s P/E ratio is 36% more expensive than NAB’s and over 66% more costly than ANZ’s.

Foolish takeaway

CBA is an excellent bank – that’s why investors value it so highly.

However, the high CBA share price means it’s much more expensive than its peers. The rise of the CBA share price has also pushed the current grossed-up dividend yield down to 5.3%.

Based on all of the above factors, it may be better to give CBA shares a miss until the forward P/E ratio becomes more attractive.

The post Would I be crazy to buy CBA shares at $121? appeared first on The Motley Fool Australia.

More reading

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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 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 Scott Phillips.