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Here’s why the CBA share price trades at a premium to other ASX banks

Sebastian Bowen
CBA share price

As anyone with a keen interest in the ASX banks would know, the ‘big four’ banks are not all priced equally. This may come as a surprise to some, as the banks are one of the most collectivised sets of companies on the ASX.

All 4 are more or less affected by the same macro-economic trends, all 4 are known as heavy dividend payers and all 4 were dragged through the mud (albeit to varying degrees) at the Royal Commission 2 years ago.

Yet there are some significant pricing differences if we look at the share prices of Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) today.

Lets take a simple valuation metric – the price-to-earnings (P/E) ratio. The P/E ratio at its core is a measure of how much investors are willing to pay for each dollar of earnings that a company produces. It’s a measure of sentiment more than anything else.

So right now, Westpac has a P/E ratio of 12.97. ANZ comes in at 11.73, NAB at 14.34 and CommBank at 17.99.

You can see there’s a clear winner.

Why does CBA trade for an ASX premium?

That’s a more nuanced question than you’d think, in my opinion. The first factor is likely size. At $145.8 billion, CommBank is significantly larger than its closest rival (Westpac at $88.8 billion) and almost twice as large as ANZ and NAB combined. This gives the bank an advantage from both scale and capital stability – the same way a building with deeper foundations can stand higher. Size means strength in banking and investors know this.

Another likely factor to this premium is CBA’s return on equity (RoE). This statistic basically translates into how much money CommBank can make from each dollar it invests. At the current time, CBA’s RoE for the last 12 months is around 12.18% (that’s $12.18 on average for every $1 invested). Westpac only managed 10.44%, ANZ 10.5% and NAB 9.4%.

You can clearly see Commonwealth Bank is the winner here too – investors generally appreciate it when their company earns money at a higher rate to its rivals.

The final factor to mention is dividends. CommBank was the only big four bank not to deliver a cut to its shareholder payments last year. If that doesn’t garner appreciation, I don’t know what would.

Foolish takeaway

CBA shares do seem to trade at a consistent premium to their rivals – and I think from the statistics above we can see why. Therefore, if I was wishing to expand my exposure to the banks, CBA shares would be on the top of my list.

The post Here’s why the CBA share price trades at a premium to other ASX banks appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020