Commonwealth Bank smashed 6%. Is there more pain ahead?

Commonwealth Bank (ASX: CBA) took a rare 6.3% dive in early trade, despite reporting a relatively sound FY25 result. After running up as much as 35% in the past twelve months though, investors shouldn't be too upset by the pullback.

This price action appears to be part of a broader trend emerging this reporting season, where crowded and strong-performing names like JB Hi-Fi and QBE Insurance are selling off on in-line results.

While we're still in the early days of August reporting season, Matthew Davison — Portfolio Manager at Martin Currie, warns that much-loved names could be in for more ugly reactions to in-line results. He reiterates CBA's valuation disconnect and the potential for further unwinding, though this all depends on where passive money flows from here.

FY25 results highlights

• Net profit after tax up 4% to $10.25bn vs. $10.25bn ests (in-line)
• Total dividend up 4% to $4.85 cents per share vs. $4.84 ests (0.2%)
• Cash payout ratio of 79%, towards the top end of the target range
• Net interest margin up 9 bps to 2.08% vs. 2.08% ests (in-line)
• CET1 ratio flat at 12.3% vs. 12.2% ests (10 bp beat)
• Return on equity down 10 bps to 13.5% vs. 13.7% ests (20 bp miss)

What was the key takeaway from CBA’s results in one sentence?

That was the key takeaway. CBA continues to generate robust results, but still pretty modest growth and we're seeing sequential momentum just weakening a bit on cost and reinvestment pressure.

Were there any surprises in this result that you think investors need to be aware of?

Look, overall no major surprises. The actual net profit line itself was in line with consensus. They had a small beat on trading income and this was offset by higher costs. One surprise was investment spend running a bit higher, especially in AI related areas, which will be a positive I think.

Could CBA V-shape back to highs? 

It’s possible. Passive money can have a really big influence, but I think there is also recognition of the current disconnect in the valuation that can unwind further.

Would you buy, hold or sell CBA off the back of this result?

Rating: SELL

For us, CBA is a stock to sell just because it trades at such a significant premium to our valuation. Still at that 29x, the valuation really is quite disconnected from the ROE and the growth. The growth trends in this result have again reiterated that it's very modest growth, so I still think the valuation's been disproportionately affected by passive money and this reflects some of that unwind. 

Are there any risks investors need to be aware of?

Its still got a very significant valuation premium that we think needs to unwind, given where the ROE and growth is.

More short-term, this reporting season we've definitely seen those loved names sell off on in-line results.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

Rating: 4

We do think the value spreads are quite wide at the moment between deep value names and more expensive names. Heading into this reporting season, we probably didn't have a strong view either way on the outlook for revisions. Economic data has been pretty reasonable and rate cut expectations have started to drive some cyclical activity. So for us, value at the moment's more stock specific than sort of labelling big sectors. But some of our more attractive names remain in areas like insurance, contractors, iron ore, energy and travel.