Stocks In Focus: Commonwealth Bank, May 7 2025

0:10G'day and welcome to Motley Fool Stocks in Focus, our YouTube and podcast series where we pretty much give you the download from one of our rockstar analysts here at the Motley Fool on what they think about a business. I'll do a bit about it, some of the pros and cons, and of course, I will put them on the spot and work out whether they reckon there's a chance it's going to be market beating over the next five or so years. Now, before we do that, my usual disclaimers I've got to throw out there. Firstly, this is general advice, not personal advice. In other words, we'll tell you what we think about a company.

0:39You've got to decide. This is the personal bit. You've got to decide whether or not it's right for you. The other thing is we're recording these at a point in time. Now, the views of our team may and probably will change from time to time based on the company, based on the price, based on whatever else is going on. So just please bear in mind if you're listening to or watching this later after the fact, our views may well have changed since then. So it's a point in time. We are long-term investors at The Motley Fool, so probably not a huge chance that they change particularly quickly or particularly regularly, but just please be aware of that if you are watching it after the date.

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1:37We do what I've been reading. We do some YouTube live stuff. We do Motley Fool TV, lots of great stuff on the channel. We've revitalized it over the past month or so. So if you're not already there, please go. If you are watching on there, please do hit that subscribe button and make sure you hit the notification bell. All right, that's all out of the way. So now I get to do the good stuff. Let's introduce Kate Lee. Kate, g'day. Hi, how are you? I'm very well. Thanks for spending some time with us. Thank you for sharing your thoughts on, I think it is the largest company on the ASX, the Commonwealth Bank of Australia.

2:06We all know it was ComBank or CBA. Tell us, well, I was going to say, tell us what ComBank does. I think we all know, but give us a bit more detail on Commonwealth Bank. You know, I immigrated to Australia in 2016. And on the very second day of arrival, I went to the city and opened my bank account with CBA. This is the company that doesn't need introduction. I am now one of the 18 million customers of CBA in Australia, which is roughly three out of four others in the country. right so they do everything like their everyday banking in in australia they're big in customer like home loans insurance waste management business banking everything in terms of revenue breakdown they make about half of their revenue in the retail banking and home lending business and then of course they are fairly big in the business lending as well globally in terms of market cap which is a bit tricky.

3:05I'll get to that because given the short price performance over the past, actually a couple of years actually now, the bank now ranks within the top 10 largest banks globally. As of today, it's actually sixth, but this number changed day in, day out. So I'll just say within top 10. So that's kind of everything we need to know in Austria. That's enough of introduction for Commonwealth Bank of Australia. Makes sense. Makes sense. Hey, happy 10th anniversary then, by the way. I didn't realise you got here in 2016. Almost there, nine years this year, and hopefully coming up to the 10th very soon. You're right.

3:40Everyone knows CBA. I think we know the logo. We know the business. Plenty of stuff about it. People older than UK will remember the little Commonwealth Bank money boxes. The most was got as kids when we were in primary school. The Dolomites accounts and the Commonwealth Bank, the Martin Place building, was a money box we all got. So it has definitely been part of the Australian fabric for many, many years. That's the business. You've done a great job. I didn't mean it. I didn't realise. Let's go to the investment case thing because there is the company and there is the investment. There are always two different things.

4:06They're linked inextricably, but they're not the same. So let's do both sides of this particular coin, Kate, if we can. What are some of the reasons that an investor might consider investing in CBA shares? CBA has been a darling of the stock market for the past couple of years, and there are a valid reason for that. Number one reason, I explained half of that already in the introduction. It's a dominant market position. It's the go-to bank for many Australians. The bank controls, in terms of assets, roughly a quarter of Australia's banking assets, which is great. Like the total asset of$1.3 trillion of CDA.

4:46That's obviously the largest among the big four. Now, what's interesting is actually Australia's banking sector, Asia sector, is one of the most concentrated among developed markets. So like big four banks in country like CBA, West Bank, NAV and ANZ, they together hold about 80 % of the country's total banking assets as compared to in the countries like US, Europe. It's usually maybe top five banks manage about like half of the total assets. So from that angle, it might be one of the reasons that could explain the valuation premium that we're getting as a whole sector, banking sector in the country.

5:26and then especially CBA in particular. And then second reason is the bank is also highly profitable. CBA, again, like if I try to compare across global banking, like across all the leading banks in the US and Europe, CBA's ROE, return on equity, is in meetings, about 13%. But then I think in terms of ROE as well, they're within, I think, top 10 or if not 20. It's just right after the banks like JP Morgan, Morgan Standing, Goldman Sachs, they are up there. But other than those companies, CBA's ROE is very high. And then their profit margin on the housing loans, it's just a very profitable bank.

6:18And then the reason is, again, it has a strong capital, strong balance sheet. Actually, in terms of numbers, I think it's a, you know, as I research this company, right, I totally understand why so many investors, pension fund, love to have the shares. It just checks a lot of boxes. And also, lastly, dividends, right? Even after such a strong run in the share price, it's dividend yield currently. is nearly 3%, fully franked. So it's fairly high for that, you know, banks is also offering the stability and predictability. And then their payout ratio is still at about 70 % to 80%, which means, you know, it can sustain this rate of payout going forward, which is also good news.

7:09So I think those are four reasons that I would like to invest in CBA bank shares today. Very nice. That's four pretty strong ones, by the way. That dividend yield pay ratio is pretty impressive, given, as you say, the price. We may talk about valuation, I suspect. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

7:36Let's do the other side of that coin and talk about reasons why investors might not invest in CBA. yes the valuation is the biggest no i mean like the banks it's very strong it's good it's good to bank it's not gonna go bankrupt anytime soon we know all that but then there's a price to pay right and then the gap to the rest of the world um it's just so big i'll i'll share some numbers right so um cda is right now trading at about 20 times above 20 times i think in terms of pe price to earnings multiple and over three times its book value. If I put in the context, US banks usually trade in the low teens, like 12, 13 times as compared to 20 for the CBA.

8:28In terms of price to book, they are between one to two times. So I understand it's a good bank. It has probably higher ROE, which is great. Clean balance sheet and everything. but I just cannot follow these several valuations. And then if it's just a valuation matter alone, my theory, when I usually do the investing, right, I say if everything's clean, everything's so good, but the valuation is the only problem, I usually go forward in my case. But the second issue I have with the bank is the limited upside, right? Like, you know, being the largest bank, I mentioned three out of four that already have an account with CBA.

9:11This is similar to the companies like Testra. You're the dominant player in a certain area. Then to grow, you really have to go beyond borders. Of course, CBA is doing a great job in New Zealand, but then beyond that, whereas could you go to grow further to justify that valuation? And then lastly, I guess the economic situation. It's really, maybe it's interesting because in economic uncertainty right now, in some sense, because it's uncertain, investors like to flock into shares like CBA because of their predictability, stability. But then if the whole economy, I'm not trying to predict where we are heading for, but then if we are going into downturn as a whole, as an economy, obviously the banking sector would not be immune to this overall downturn.

10:12And then it's not just about CBA, but then any shares with stretched valuations would be very tricky to invest, in my view. So those are three points that might kind of let me down on this investing idea. Very nicely put. I should say, too, by the way, you mentioned the global banks. CBA is much more expensive than our other three of the big four banks here at home. So it's not just a bank premium in Australia in general. although Australian banks tend to be a little bit more expensive than the foreign ones, but CBA is much more expensive than the other three of the big four as well. Yep. All right, I think I might know which way you're going to lean on this one, but I'm open to being surprised.

10:54So, again, this is not a formal recommendation, I should say. If you're new to this series, we have recommendations that we have at The Motley Fool. Those formal recommendations, we actually share one a month in stock of the month, so it's worth hanging around on the YouTube channel for that. But so this is not a formal recommendation. I'm not going to ask whether it's a buyer or seller, Kate, But what I'm going to ask you is what you think are the likelihood of this being a market-beating investment over the next, say, five years or so. I think it depends. Okay, my answer is I don't think it will be market-beating from here.

11:23Of course you might say that. I'm just answering you right away. But then I think it depends on which age group you are in or what kind of risk appetite you have. If, say, you're retiring, you're fine. I don't need too much upside. You just want that consistent dividend payout. Then I kind of understand why this investment may have merit on your portfolio. But in my case, I think, let's put it this way. This is good bank, solid bank, safest, bit expensive, but good dividend payer. But I just see there might be other opportunities. out there, which may give you a higher upside. I guess that's how I would sum it up.

12:12Yeah, very, very nicely placed. Commonwealth Bank of Australia, the biggest bank in the country, the biggest company in the country, but maybe not one, at least in Kate's view for your investment, unless you have certain particular needs that don't rely on the total return being market B. Is that fair to say, Kate? Yeah, that's my stance. Beautiful. Thank you very much. Hey, Spurs, thanks for spending some time with us. If you're listening, thanks for listening on the Motley Fool Money podcast. Thanks for joining us on YouTube. We'll be back in both of those places very, very soon, but we appreciate you spending a bit of time with us.

12:41Kate, thank you for sharing your expertise with our viewers and listeners as well. And until we chat again, Fool off. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.