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Commonwealth Bank’s market valuation has broken through $200 billion for the first time, as investor hopes of interest rate cuts sparked a rally in bank shares and lifted the market to a record high on Friday.
Markets have this week moved to price in a higher chance of US interest rate cuts in June, after US Federal Reserve chair Jerome Powell said he was “well aware” of the risk of waiting too late to cut rates. If conditions continue as expected, including a strong job market and cooling inflation, cuts would come later this year, he said.
The ASX hit a new high on Friday.Credit: Louie Douvis
Locally, investors are betting the Reserve Bank will cut the cash rate twice by the end of the year, with the second cut in September, fuelling a rally in share prices. As investors debate whether bank stock prices are overvalued, shares in the country’s biggest bank surged 1.6 per cent to close just shy of its record high, at $121.45 a share.
The move means CBA is the only company aside from BHP on the ASX with a market capitalisation of more than $200 billion. The next biggest companies on the market are Rio Tinto, biotech giant CSL, National Australia Bank, Westpac, ANZ Bank and Fortescue Metals Group.
While some analysts argue bank shares are being overvalued, especially following recent trading updates which showed profit margins coming under pressure, Jarden analyst Carlos Cacho argued the sector’s strong run could continue, saying bank shares had typically outperformed following interest rate cuts. Cacho pointed to reduced bad debt forecasts, better-than-feared margins amid stabilising home loan and deposit competition, and upgraded credit growth, saying these measures, along with a positive macroeconomic backdrop, suggested banks could continue to outperform.
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However, BlackRock Australasian head of fixed income Craig Vardy said at a media roundtable this week markets were likely too optimistic about the prospect of a rate cut from the Reserve Bank.
“When you get some [stronger than expected] data, markets are not selling off as aggressively,” he said, predicting there will not be a rate cut until November or December. “Inflation is clearly the number one priority for the RBA.”