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Thursday, the Commonwealth Bank of Australia (ASX: CBA) the stock price rose despite the market sell-off.
This was prompted by a positive reaction to the banking giant’s third quarter update.
What happened in the third quarter?
For the three months ended March 31, compared to the first-half quarterly average, Australia’s largest bank revealed a 1% decline in operating profit to $6,103 million and a cash profit stable at $2,400 million.
According to a note from Goldman Sachs, that means the bank’s quarterly cash earnings are 10% ahead of its second-half forecast. In addition, it was 9% higher than analysts’ consensus estimate.
Is the CBA stock price in the buy zone?
Although the bank impressed during the quarter, Goldman Sachs still doesn’t see enough value in CBA’s stock price to change its recommendation.
As a result, this morning the broker maintained its sell rating with an improved price target of $89.86.
Based on the current CBA stock price of $102.15, this implies a potential downside of 12% for investors over the next 12 months.
Why is the broker bearish?
The main reason Goldman is bearish on CBA stock price is its valuation. The broker simply does not believe that the bank’s shares deserve to trade at such a premium to its rivals.
Overall, we reiterate our given sell rating: i) while CBA’s balance sheet is strong and operational, it has outperformed in terms of volume growth compared to its major banking peers (ANZ at 0, 3x system average WBC at 0.4x, but NAB at 1.2x), ii) NIMs remain weak as CBA is more exposed to industry-wide headwinds (high swap rates, composition effects portfolio and price competition). As such, we don’t think this justifies the 53% PPOP premium it is currently trading at relative to its peers (peers adjusted for ex-dividend; vs. 26% 15-year average).