Australian banks, in terms of share price rallies, have been the stars in the Asia Pacific region. The S&P/ASX 200 Financials – the benchmark that contains all Australian banks – has surged 17.23% on a year-to-date basis and over 33% on a 52-week basis.
These returns in Australia’s banks are in sync with its Wall Street counterpart – although the specific S&P US Bank Index has grown at a faster rate 26.55% year-to-date.
So, it is natural that with such rally, the shares of individual banks would also rise. The Commonwealth Bank of Australia (ASX:CBA) is Australia’s largest bank – valued at a whopping AU$174.91 billion – about double the worth of Westpac Banking Corp (ASX:WBC).
How have Commonwealth Bank shares surged this year?
The shares of the banking major, despite some hiccups in the past few days, have given a healthy return to investors. The bank’s shares have outperformed the sectoral index – both on year-to-date as well as on an annual basis. On a year-to-date basis, the shares of bank have surged 18.24%. On the other hand, on a 52-week basis, the shares of the banking behemoth have leapt 37.31%. This rally was triggered by Australia’s faster-than-expected economic recovery. At the time of writing this copy, the shares of Commonwealth Bank were trading at AU$99.03.
Will they cross the AU$100 mark?
Before we proceed to mull over this, it seems pertinent to note that the Commonwealth Bank is not new to AU$100-a-share club. Earlier in June 2021, for the most part of the month, its shares were trading over the AU$100 level. However, in July 2021 it has been trading below that mark. That said, at AU$99.03 mark, the scrip is just 70 basis points shy of the AU$100 mark. Given the precedent, the shares of CBA are likely touch AU$100 yet again. There are strong fundamentals to it – from healthy earnings, to rising long-term yields. In fact, it should not be an exaggeration to say that its current price of around AU$99 is an aberration due to the persistent selling pressure.
What would it mean for common investors?
Any rise in the share prices, without an equal rise in the earnings would mean that the shares have become costlier. In technical terms, if share price increases with earning per share (EPS) remaining constant, the price-to-equity (PE) Ratio (the number of pennies paid by an investor for every penny earned in a company) surges. A higher PE Ratio would mean that the shares are less lucrative for investors unless they follow the greater fool theory. Globally, banks are way more lucrative than other sectors when it comes to the PE Ratio. For every penny an investor earns in the banking sector globally, the investor ends up pay 14.88 pennies – 46% cheaper than 27.38 paid for all sectors combined. However, Commonwealth Bank’s shares are way costlier when it comes to the PE Multiple. At 22.06 PE Ratio, it is one-an-a-half times costlier than the average banking PE. This would be highest even by Australia’s benchmarks, where banks have a higher than global average PE ratio – with Australia and New Zealand Banking Group Ltd (ASX:ANZ) at 17.06, Westpac at 21.86% and National Australia Bank Ltd (ASX:NAB) at 20.13.