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Australia’s top bank CBA lures funds exiting China despite profit outlook By Reuters

Australia's top bank CBA lures funds exiting China despite profit outlook

© Reuters. FILE PHOTO: A woman walks past a Commonwealth Bank of Australia logo and ATM in Sydney, Australia, February 7, 2018. REUTERS/Daniel Munoz/File Photo

By Lewis Jackson and Praveen Menon

SYDNEY (Reuters) – Australia’s largest bank, Commonwealth Bank, is expected to report a small drop in first-half profit this week, but that hasn’t deterred investors from pouring into its shares and turning it into one of the world’s most expensive banks.

The stock has jumped more than 20% since November, outperforming a 12% rise in the wider market, with the help of investors fleeing China’s battered markets and those switching to equities on expectations of interest rate cuts.

As the market’s second-largest stock, it is benefiting from an outsized share of the money pouring into Australian equities from home and abroad, say analysts and investors.

As a result, Commonwealth Bank is now trading just off its all-time high, valuing it at 21 times forward earnings per share, or nearly double Wall Street giant JPMorgan’s earnings multiple and more than triple HSBC’s.

Its market capitalisation is now roughly double its nearest rival, National Australia Bank (OTC:).

For investors fleeing China’s stuttering market amid a prolonged property crisis and looking for safe, liquid places to put their money, Australian banks, and in particular CBA as the largest and most well known, are an easy pick, said Matthew Haupt, a portfolio manager at Wilson Asset Management.

“Australian banks have been massive beneficiaries of the pull back from China,” he said. “As people reduce their MSCI Asia exposure, Australian banks are an obvious choice.”

LOFTY VALUATION AT RISK

However, for most analysts, among whom the average price target for CBA is A$91, or 22% below Friday’s close, the recent rally has long outstripped fundamentals.

When it releases results on Feb. 14, CBA is expected to report a first-half cash profit of A$4.973 billion, down 3.7% from a year earlier, according to the Visible Alpha consensus cited by UBS.

The decline is mostly down to a higher effective tax rate and the sale of its Indonesian banking unit, although interest margins are also shrinking, Barrenjoey equity analyst Jon Mott said in a note earlier this month.

“We do not believe such extreme multiples are sustainable given these earnings headwinds,” he said.

“The result may be a catalyst for a share price correction.”

Margins are in focus as Australia’s top lenders look to shore up positions in the…

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