Why is CBA trading so strongly?

There doesn’t seem to be anything stopping the meteoric rise of the share price of Australia’s largest bank the Commonwealth Bank of Australia, which has climbed from $113 a share to a high of $168 during the past twelve months.

Most analysts say it is completely nonsensical and a recent comparison between the financial performance of the Commonwealth Bank and a similar sized bank in England, Lloyd’s Bank, shows just how out of whack this is.

Both the Commonwealth and Lloyds are a similar size at $10.5 billion and $11.7 billion respectively and with about the same size loan book of $975 billion and about $80 billion in equity.

Having said that, the local market is pricing the Commonwealth as being worth $250 billion, which is three times the valuation of Lloyds, where the UK market values it at just $82 billion.  So why is it so?

A lot of it has to do with Australia’s tax system and the fact the Commonwealth Bank pays such high fully franked shares that are so valuable to Australian investors, both retail and institutional.

There are also issues with the other three Australian banks that are holding back their share price. The NAB has a new CEO, Westpac is at the start of a long and expensive technology upgrade and the ANZ is about to replace its CEO.

All the big banks are large and bring the comfort of investing in large well-run companies.  They also offer relatively safe spaces to invest in here in Australia where they have little direct exposure to export markets in the way BHP and the other big miners have.

There is also a perception that the Australian Banks will easily weather the disruptions caused by Trump’s new brand of economics and any disruptions that a US /China trade war might bring to world markets.

And of course, any of the arguments for investing in any of the Australian banks are fourfold the reason for investing in the Commonwealth Bank which is seen as the best and most profitably of the four Australian banks.

Needless to say, the Commonwealth Bank does look expensive at these levels but then it has looked expensive for the past thirty years and yet everytime you think it can’t trade any higher, it has done exactly that.

So once again the question must be asked, is it time to sell? I would answer yes if you had a reason to sell then yes, this is a good time to take some profits and sell some Commonwealth shares and upgrade the car or go travelling for example.

However, it is also a good time to buy as it is impossible to see the Commonwealth Bank losing the momentum that has been building for more than thirty years that it is the most profitable bank in Australia and for shareholders, the most rewarding.