Is now the time to take some profits on CBA shares?

ASX bank shares had a fantastic year, with the S&P/ASX 200 Banks Index (ASX: XBK) surging 30% over the past year, outperforming the 6% return of the S&P/ASX 100 Index (ASX: XTO).

Commonwealth Bank of Australia (ASX: CBA) shares performed well, increasing by 30% over the past year, in line with the ASX 200 Bank Index.

After the stock price surge, the bank became Australia’s largest company through market capitalisation, overtaking mining giant BHP Group Ltd (ASX: BHP).

But, after such a wonderful year, is it the right time to consider locking in some gains?

How expensive are CBA shares?

It’s exciting to see the share prices rise rapidly. However, it becomes problematic if earnings fail to grow quickly enough to keep up with the share price performance. That might be the case here for CBA shares.

According to S&P Capital IQ, analysts predict that the bank’s earnings-per-share (EPS) will remain steady, rising from $5.76 in the trailing 12 months to $5.91 in FY26, representing approximately 1% annual growth.

The bank’s 1-year forward price-to-earnings (P/E) ratio has increased from 16x in March 2023 to 23x now due to inconsistencies in earnings growth and share price movements. This is not only the highest P/E multiple in its history but also more expensive than other ASX bank shares. Compared to its peers, based on S&P Capital IQ estimates:

• Westpac Banking Corp (ASX: WBC) shares are valued at FY25 P/E of 15x
• National Australia Bank Ltd (ASX: NAB) shares are valued at FY25 P/E of 16x
• ANZ Group Holdings Ltd (ASX: ANZ) shares are valued at FY25 P/E of 13x

Expert views

Bell Potter believes it is time to sell CBA shares. The broker has a sell rating on CBA shares mainly due to higher valuations relative to the bank’s growth potential, according to The Bull. Analyst Christopher Watt said:

Our recommendation is based on potential overvaluation concerns and limited growth prospects in a fiercely competitive banking sector. While it remains a strong institution, its current market price may not justify the investment risk. The shares have risen from $111.86 on April 19 to trade at $129.85 on July 11. Investors may want to consider taking some profits.

Melbourne-based fund manager L1 Capital is another expert noticing CBA’s high valuations. In its latest investment letter for the June quarter, the asset manager highlighted:

CBA currently trades at the most expensive valuation in its history, despite offering no earnings growth for the next two years. It also stands out as an outlier relative to the other major Australian banks, trading at a ~60% premium to peers on an earnings multiple basis compared to its long-term
average premium of only ~17%. In our view, this performance is not supported by fundamentals, rather it indicates a level of crowding and over-valuation.

After all, this might be an opportune time to realise your profits, according to these experts.

The CBA share price is up slightly by 0.075% to $132.79 this morning.

The post Is now the time to take some profits on CBA shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Kate Lee 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.