(Bloomberg) — Veteran hedge fund manager Philip King has taken a short position in shares of Commonwealth Bank of Australia, citing one of the world’s most expensive valuations.
With a forward price-earnings multiple of 22 times, CBA is the priciest bank on the MSCI World Bank Index and compares with 11.7 at JPMorgan Chase & Co. King, the chief investment officer at Regal Funds Management Pty, said he expects CBA’s earnings-per-share to decline in coming years.
“Australian banks are now getting attacked from all angles by competition,” King said in an interview in Sydney. “Buy now, pay later operators are taking share in consumer lending, non-bank lenders are taking share in business lending and private credit are making inroads across the entire loan book,” he said.
In addition, stringent capital requirements are making the country’s lenders “increasingly uncompetitive,” he said.
Regal has grown from a four-person team in 2004 to around 145 people and manages about A$12 billion ($7.9 billion) from offices in Sydney, Singapore and New York across the Regal Partners group. It’s expanded from a mainly long-short equities fund into an investment manager across private markets and alternatives.
The Regal Long Short Australian Equity Fund has returned 25% over the past year, beating around 80% of its peers, data compiled by Bloomberg show.
A CBA spokesperson declined to comment.
Bank stocks around the world have benefited from higher interest rates and that’s helped drive a gauge of Australian financial shares to a record high this month. CBA returned about 37% over the past year, compared with 31% on the MSCI world index of banks.
EPS for CBA currently sits at more than double its domestic competitors, National Australia Bank Ltd., Westpac Banking Corp. and ANZ Group Holdings Ltd.
“For 20 years the share price was driven by strong EPS growth, but over the last 10 years EPS growth has stalled,” said King, who initiated the short position earlier this year. It is now “one of the most expensive banks in the world and could derate over the next 10 years if EPS falls as we expect it will.”
Australia has among the world’s highest adoption rate for buy now, pay later services as consumers favor the advantage of immediate purchases with deferred payments, a Bank of International Settlements report showed in December. That’s lifting competitive pressure at the same time as CBA’s key mortgage business continues to battle for profit.
Among its bullish picks, the hedge fund manager is backing Capstone Copper Corp., which he says is being turbo-charged by the green-energy transition and flows into artificial intelligence businesses. The stock, little changed in Sydney trading since listing earlier this year, focuses on exploration and production of copper and silver with services in Canada, the US, Mexico, and Chile.
–With assistance from Harry Brumpton.
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