MARKETS SPECTATOR: CBA caution

The last few days has seen a bit of broker activity in the banking space, with giant Commonwealth Bank of Australia downgraded.

Recently (MARKETS SPECTATOR: NAB's time to shine, December 7) I talked about the likelihood that we would start to see money flow from CBA, which has easily outperformed over the last 12 months to major underperformer National Australia Bank.

UBS has been the most recent broker to re-evaluate CBA, cutting the giant to sell from neutral following a sharp share price appreciation that saw its market cap exceed $100 billion for the first time. Its target price for the stock is $55.

"While the market correctly focuses on more traditional valuation metrics, we believe market capitalisation provides a good reality check. Classic examples of this include: in June 2008 when Fortescue's market cap exceeded that of ANZ's. Although nowhere near this extreme, we note that following the recent rally CBA's market cap has cracked $100 billion,” UBS noted.

The broker believes the bank is performing well and expects a solid first half result for 2013. However, the most recent run-up in price has been driven by the seemingly relentless chase for yield, which UBS sees as dangerous.

"CBA's price has seen support by cash and term deposit rate reductions. We see this as dangerous. Banks are neither utilities nor annuities and it is not wise to capitalise a benign credit environment into perpetuity. The RBA is cutting rates for a reason,” UBS said.