Top broker says the Commonwealth Bank (ASX:CBA) share price is still overvalued

This banking giant’s shares may be expensive according to one leading broker…
The post Top broker says the Commonwealth Bank (ASX:CBA) share price is still overvalued appeared first on The Motley Fool Australia. –

The Commonwealth Bank of Australia (ASX: CBA) share price was well and truly out of form on Monday.

The shares of Australia’s largest bank dropped a sizeable 5.7% to $98.06.

Why did the Commonwealth Bank share price tumble?

The Commonwealth Bank share price came under pressure on Monday after broad weakness in the banking sector offset the release of a positive announcement relating to another divestment.

In respect to the latter, the banking giant has signed an agreement to sell its general insurance business to underwriter Hollard Group for $625 million. It also includes undisclosed deferred payments that are payable upon achieving certain business milestones.

Furthermore, the agreement will see additional investment from Hollard throughout a 15-year strategic alliance to drive innovation and enhance the customer experience. Commonwealth Bank will also continue to earn income on the distribution of home and motor insurance products.

Should investors buy the dip?

Despite the sizeable pullback in the Commonwealth Bank share price on Monday, one leading broker doesn’t believe investors should be jumping in just yet.

According to a note out of Morgan Stanley, its analysts have retained their underweight rating and $89.50 price target on its shares. Based on the latest Commonwealth Bank share price, this price target implies potential downside of ~11% over the next 12 months.

The broker estimates that the deal with Hollard will boost its CET1 ratio by an estimated 9 basis points and expects it to support a $5 billion share buyback in August.

However, even after factoring this buyback into the equation, it isn’t enough for Morgan Stanley to become more positive on the bank. It notes that the company’s shares are trading on record high multiples and believes there is a better option for investors among the big four.

That option is Westpac Banking Corp (ASX: WBC). Earlier this month the broker put an overweight rating and $29.20 price target on its shares. This implies potential upside of ~10% over the next 12 months.

The post Top broker says the Commonwealth Bank (ASX:CBA) share price is still overvalued appeared first on The Motley Fool Australia.

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James Mickleboro owns Westpac shares. 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 Bruce Jackson.

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