Bye-bye Commonwealth Bank bubble?

For the past month, I have been warning of the inflating Commonwealth Bank share price bubble. Last week it reached a preposterous 22x forward earnings, far above any rational valuation and 50% above the value of its identical peer banks:

This utter stupidity, doubtless driven by a mad dash for yield, even though CBA’s dividend is now the lowest of the big four, may have reached its zenith on Friday, as the price fell sharply. There will be more falls today:

The two other metrics I have charted against CBA are US and European financial sector indexes.  As you can see, a goodly global bank correction is underway across DMs. Why? Bloomie:

  • Banks are among the S&500’s worst June performers.
  • The value trade driven by inflation concerns is reversing as inflation peaks.
  • Trading revenues have slumped.
  • Profits aided by capital writebacks and low defaults on stimulus are fading.
  • Commercial lending is recessionary.

Sounds all too familiar to Downunder banks to me.

The key macro driver for the sell-off is the flattening of the yield curve as the Fed lurches towards a policy error. Banks borrow short and lend long so flattening curves are bad for profits. The same is underway here:

The policy error here is, if anything, going to be worse for banks as it takes the form of macroprudential just as the terms of trade crash on Chinese credit tightening.

Houses and Holes
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  1. We are entering the typical regulatory storm whereby our government and regulators are moving head long into a weakening economy with macroprudential tools and reducing stimulus as the economy slows. I thought that we could have one negative quarter, but looks like we will have a second one at least. Bcnich called it, look out below!

  2. RanganutsMEMBER

    It’s easy to call the top… when it’s at the top? (You are doing the same with Iron Ore, it’s not rocket science).

    Everything is going down today.

    Is it right to compare Australian Banks to Overseas banks?

    I think investors/traders aren’t placing enough future value on what banks are doing with their IT infrastructure. The changes over the next few years are going to be immense and put $$$ on the bottom line.

    Everyone was bashing CBA in 1999 when they were $23. And again and again and again as I kept adding more to the portolio. As a long term investor this is nothing more than a small ripple in the fabric of the market.

    • Nick1970MEMBER

      Yep I don’t think this talking about talking about interest rate rises is going to kill the bull just yet

    • Even StevenMEMBER

      I’m not as bearish on banks as most others on MB, but CBA is priced to perfection relative to the other banks. Pretty sure the other banks are spending similar % of their revenues on IT development, so what’s in the magic CBA sauce the others don’t have?

      Not a good bet.