Broker says this ASX bank is a "growth stock" with 40% upside

Most professional investors agree Australia's bank stocks are overvalued, with Commonwealth Bank's (ASX: CBA) bizarre 12-month bull infuriating fund managers under pressure not to fall behind the index.  

However, dig beneath the surface and there's one bank with strong profit growth potential alongside a cheap valuation - if professional analysts are on the money. 

It's business lender Judo Bank (ASX: JDO).  The lender is aiming to carve out a niche by sidestepping the competitive home loan market to focus on profitable lending to the small and medium-size business sector.

The bank's shares tumbled 17% to $1.48 on May 1 after it warned of margin pressure and slower lending growth. However, this may prove an opportunity as UBS values the stock at $2.20.

Based on long-term forecasts, UBS has pencilled in Judo to make pre-tax profits of $300 million in FY29, representing significant growth from its current market cap of $1.78 billion at $1.59 per share.

Needless to say if these forecasts are on the money, today's Judo bank shareholders are likely to make healthy capital gains over the next four years. 

Lending is a risky business 

Unfortunately, investing isn't that simple and there's plenty of risks that could drag Judo Bank's shares lower from here. 

These include rising bad debts as Judo makes generally riskier loans to small and medium-sized businesses that can often run into trouble. 

It does not take much of a bad debt accumulation for a bank to run into serious trouble as lenders like Judo rely on their own borrowings (rather than investor capital) to finance lending. 

This means it only takes a small fall in the value of a bank's loan book to wipeout shareholders' equity. 

This is something to note alongside the fact that the market is not likely to take kindly to a slowdown in lending growth, or margin compression. 

These principles apply to the entire banking sector and the big-four banks are generally considered overvalued as they trade on too high a multiple of their loan books or profits given the risks around a lending slowdown, margin compression or rise in bad debts. 

Sell CBA shares?

Australia's biggest bank CBA is also vulnerable to a margin squeeze and this is partly why fund managers dismiss its stock price run as absurd and even claim they'd rather stick pins in their eyes than buy shares. 

Taking a look at the numbers, the stock fetched $179.69 on Friday and consensus analyst forecasts call for it to pay a final dividend in FY25 of $2.40 per share to take full year dividends to $4.65 per share plus 100% franking credits. 

Most investors own banks for the dividends and CBA's yield is just 2.6% based on today's share price. 

Even if lifts its dividend to $4.85 or $5 per share for the 12 months to June 30, 2026 you'd need rocks in your heads to pay today's prices. If that dividend goes sideways or lower as margins compress, watch out below. 

On June 27, Macquarie's Australian banks team put out research warning that as the Reserve Bank cuts cash rates over 2025 the margins and profitability of lenders like CBA could moderate. 

This puts it on 29 times forward earnings to mean shares could slump if the market comes to its senses. Macquarie rates the stock an "underperform" with a $105 price target. While UBS is also a sell with a $120 price target.