Commonwealth Bank Shares Reach Unprecedented Highs Amid Rate Cut Speculations

This week, Commonwealth Bank's share prices soared to an all-time high, reaching above $113, taking the bank’s market value near $190 billion. This record-breaking milestone comes amid investors' optimism that interest rates will fall, supposedly benefiting big corporations.

Rising Share Prices: A Puzzling Trend

There lies a perplexing trend behind the spike in CBA shares and, to a lesser extent, those of its banking counterparts. Under normal circumstances, banks, which are known to be sensitive to economic downturns, wouldn’t be expected to see their valuations at such high levels during risky economic periods.

Furthermore, the banking sector has been fiercely competitive, engaging in a rate war over mortgage deals, which traditionally would reduce their profits. Adding to the complexity is the fact that while banks had strategically profited from rising rates — by increasing borrowing costs more than what they paid on savings — they seem to be poised to also benefit from the anticipation of rate reductions.

The Challenge of Rate Cuts Ahead

While lower interest rates typically bolster bank shares, the scenario this time suggests that the same level of profit may be harder to achieve. Past strategies, like marginally passing on rate cuts to borrowers, might not be viable without risking political and public pushback, especially after high inflation rates have strained household finances.

Moreover, customers are becoming adept at navigating the banking landscape, often ready to switch banks or negotiate loans to secure competitive rates, weakening the banks' ability to 'dupe' borrowers.

What’s more, the bank’s shrinking profit margins signal potential declines in earnings, as suggested by the reduced net interest margins reported by NAB, Westpac, and ANZ.

Analysts Skeptical of Current Valuations

Despite markets pricing in expectations of sliding interest rates and a possible 'soft landing' for the economy, analysts from Citi and Morgan Stanley express skepticism. They point out the recent run-up in bank share prices might be unjustified given their 'full' valuations and 'deteriorating' fundamentals.

For the bullish outlook to hold, it would require a combination of favorable conditions such as a rebound in the housing market, a reduction in mortgage rate discounting, strategic loan re-pricing, and a boost in bank dividends and share buybacks. Yet such a perfect alignment seems overly optimistic.

In conclusion, while bank shares like those of the Commonwealth Bank are ravaging the stock market, the financial outlook remains uncertain, raising questions about the sustainability of such high share valuations.

shares, banks, economy