UBS analysts downgrade shares in ASB's parent CBA to 'sell' from 'neutral' citing its market cap topping A$100 bln and 'stretched' valuation metrics

By Gareth Vaughan

Analysts at UBS have downgraded their rating on shares in ASB and Sovereign Insurance's parent Commonwealth Bank of Australia (CBA) to "sell" from "neutral" citing its market value recently topping A$100 billion (about NZ$125 billion) and "stretched" valuation metrics.

In a research note entitled 'Everything has a price. Downgrade to Sell' UBS' Sydney-based analysts Jonathan Mott, Chris Williams and Adam Lee say although the market correctly focuses on more traditional valuation metrics, they believe market capitalisation provides a good reality check.

"Classic examples of this include during the 1980s when the Tokyo Imperial Palace gardens were valued at more than the entire real estate in California, or June 2008 when FMG's market cap exceeded that of ANZ," the UBS analysts say.

"Although nowhere near this extreme, we note that following the recent rally CBA's market cap has cracked A$100 billion."

The new UBS report comes after the same analysts pointed out last August that CBA was now so big it was worth as much as Credit Suisse, Standard Chartered and Singapore's DBS combined. And when CBA's market capitalisation topped US$100 billion in December, The Wall Street Journal pointed out this meant Australia's biggest bank was valued at more than all of Germany's banks combined.

And with its market capitalisation equivalent to about NZ$125 billion yesterday, CBA's valued at almost twice the entire NZ$67.1 billion value of the NZX.

After a sharp rise in its share price driven by CBA's defensive earnings and a global chase for yield, the UBS analysts said in August that given the bank was now valued at 3 times its net tangible assets (NTA), and with a price to earnings ratio (PE) of 12.8 times, CBA was one of the most expensive banks in the world.

In their fresh report Mott, Williams and Lee say they have been supporters of CBA for many years and fundamentally remain so, given it has a strong franchise delivering good returns to investors, has solid management, led by New Zealander Ian Narev, and a relatively conservative balance sheet.

"It has consistently outperformed peers and the market," the analysts say.

"However, with limited growth we think CBA's valuation metrics are now stretched. It is trading on a 3.2 times NTA , 14.4 times PE and 9.2 times pre-provision profit. We downgrade our rating to sell."

Mott, Williams and Lee also note that CBA's share price has been supported by cash and term deposit rate reductions, something they believe to be "dangerous."

"Banks are neither utilities nor annuities and it is not wise to capitalise a benign credit environment into perpetuity. The Reserve Bank of Australia is cutting rates for a reason."

CBA's due to issue its first half-year financial results on February 13. The UBS analysts expect these to be "solid."

Meanwhile, analysts at Citigroup have CBA on their list of most favoured global stocks citing it being more capital efficient than peers and having a large earnings contribution from its wealth management operations.

For the year to June 30 2012, CBA posted record annual cash profit of A$7.1 billion, which was up 4% year-on-year. Its return on equity was 18.6% - high from a bank by global standards these days - and it paid dividends of A$3.34 per share. As of June 30 the group had total assets of A$718 billion, total staff of 51,000 and 14 million customers.

Some 93% of CBA's assets are in Australia, 6% in New Zealand, and just 1% elsewhere.

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