Unprecedented Surge in Bank Shares Puzzles Analysts

An unexpected rise in stock prices for the country's leading bank has market experts and investment circles scratching their heads. The biggest bank's shares are hitting nearly record values, which seems illogical given the current economic challenges the industry is facing. This perplexing trend is seen as shares in banks have generally increased.

The recent financial reports have only deepened the market's worries, showing that the profitability of Australian banks is under pressure from intense competition and the burden of higher costs. Nonetheless, the banking sector's stock prices have climbed, with all four of the major banks reaching one-year highs on a recent Monday. Among these, the Commonwealth Bank stood out, attaining an all-time high share price before experiencing a modest dip the following day.

Over the past six months, the stocks of these four major banks have appreciated by a minimum of 14 percent. This uptick reflects the growing investor confidence in the economy experiencing a 'soft landing,' minimizing the potential impacts of economic downturns.

Bank Profit Margin Concerns

As banks face more late payments on mortgages and profit margins shrink due to fierce rivalry and elevated funding costs, their share prices continue to soar—a situation some analysts find hard to justify. According to Azib Khan from E&P Capital, the probabilities that the banks will surpass earnings estimates are thin, and the uptrend in shares may be overly optimistic, particularly if interest rate decreases come into the picture.

Analysts point out, however, that net interest margins aren't guaranteed to fall if banks decide to hold back on passing the full effect of rate cuts to borrowers. Morgan Stanley's Richard Wiles highlighted that the banks currently have peak price-to-earnings multiples, even though the recent results only reflect stable operational trends without significant surprises. This, according to Wiles, does not support the current high multiples.

Investor Behavior and Market Dynamics

Despite dividends yields dropping and expectations that earnings will not rise, investors keep buying shares. Gary Glover from Novus Capital remarks that this pattern is 'hard to fathom,' especially for a bank like CBA, which has low yield forecasts. Nevertheless, market leaders often experience a rally during a growing market, which may partly explain this phenomena.

On a comparative engagement scale, Citi analyst Brendan Sproules points out that CBA is advancing at a slower pace compared to other banks, and has no buy ratings from analysts as per Bloomberg data. CBA is losing ground in both the mortgage sector and business lending to competitors such as Macquarie Bank, which reported robust growth and aggressive banking strategy announcements.

Lastly, according to Matthew Wilson from Jefferies, the inflow of passive investment funds may also be distorting the underlying fundamentals of these stock price movements, as passive investments often disproportionately influence market-leading companies.

banks, shares, analysts