Markets: A CBA dampener

Dividend expectations have supported Commonwealth Bank, but investors may find the impetus for further gains in the bank’s share price, higher dividends or earnings growth lacking.

Commonwealth Bank's stock is trading at levels very similar to the beginning of May when UBS analyst Jonathan Mott warned that Australian bank shares were trading in “bubble” territory. The bank's shares are up 33 per cent in 12 months and 13 per cent since June 7 when they were at $65.02. The stock closed at $73.73 yesterday.

Despite the largest net profit by any Australian bank in a 12-month period – $7.8 billion – the stock fell 1.1 per cent yesterday. Narev himself dampened hopes of a bigger payout ratio at a news conference, declaring himself “happy” with a dividend payout ratio of 75.4 per cent.

That may not be enough to keep some others happy. The rally in bank stocks has been largely fuelled by investor expectations of secure and rising dividends due to secure business platforms largely unthreatened by competition.

After Mott’s bubble comment was made bank shares were sold, but like Commonwealth Bank’s own stock they have since rebounded, helping to drive the S&P/ASX200 Index close to its 52-week high of 5220.987. Yesterday the index closed at 5157.419. Finance stocks make up 45 per cent of the index.

But it’s hard to see any impetus for further bank share price increases. Narev talked about how the bank’s investment spend will fall. He did not outline any new business initiatives in Australia or abroad that will significantly boost the bottom line. If anything the former McKinsey consultant talked more about risks to the Australian economy. There are risks holding bank stocks if investors expect share price gains similar to the past 12 months. 

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