UBS backs Westpac as CBA’s lofty premium faces reckoning

Commonwealth Bank could post a $10.8 billion profit and still disappoint investors, with UBS arguing its lofty valuation leaves little room for anything less than a flawless result.

The investment bank has retained a sell rating and a 12-month target of $135 ahead of CBA’s August 12 full-year result, 24 per cent below Wednesday’s $178.66 close.

UBS expects cash earnings to rise 6 per cent and broadly match market forecasts. Its concern is the premium investors are already paying for Australia’s biggest lender.

CBA trades at 26.6 times forecast earnings, compared with 15.8 times across NAB, Westpac and ANZ. Investors are also paying $3.70 for every $1 of CBA’s net assets, more than double the average across its major rivals.

Analysts John Storey and Nicholas Sobolev called CBA “fully valued” and noted its previous update triggered the bank’s “largest sell-off since IPO” following an increase in provisions for possible loan losses.

They said investor mortgage growth and CBA’s share of new lending would face close scrutiny, with fiercer competition for existing borrowers threatening to squeeze margins.

Westpac, by contrast, won UBS’s backing. The broker upgraded it from neutral to buy and lifted its target from $38.80 to $45.

Its shares had dropped 6.5 per cent this year and trailed the broader market by about 10 percentage points, but UBS said the sell-off was “overdone” as investors overlooked growth in its business and institutional banking divisions.

The analysts said chief executive Anthony Miller remained in the “early innings” of a turnaround that could help Westpac close the gap with CBA. Westpac reports a third-quarter update on August 10.

NAB remains UBS’s other preferred major, with its target lifted from $47.50 to $50, implying 21 per cent upside from its recent price.

Its strength in business and institutional banking leaves it well placed to capture borrowing tied to artificial intelligence, data centres, defence and infrastructure. NAB reports on August 17.

ANZ, which reports on August 13, remains UBS’s weakest major. Despite owning Australia’s largest institutional banking franchise, the broker called it the “clear earnings laggard” and the sector’s “weakest momentum story”.

UBS said the division had “gone backwards” and failed to turn its scale and investment in new systems into stronger growth and returns.

ANZ could receive the biggest earnings boost if institutional lending accelerates. UBS’ high-growth scenario would add 7.1 per cent to its 2028 earnings, but the broker lifted its target only from $35.80 to $39 and kept a neutral rating.