CBA's Premium Valuation Faces Its Biggest Test Since the Bears Started Circling

Years of beating short sellers gave way in May to a trading update miss and budget reforms aimed squarely at CBA's mortgage book.

14 Oct 2026 · 5 min read

Commonwealth Bank has spent years being called the world's most expensive bank, and for just as long it has kept beating the fund managers betting against it. Through the first half of 2026 it did it again, posting earnings upgrades, low bad debts and a rally that pushed it to nearly 12 percent of the ASX200. Then in May, two things happened in quick succession that gave the long-suffering bears their strongest argument yet: a trading update miss and a federal budget that hit CBA's mortgage book harder than its rivals'. The debate over whether this is finally the turning point, or just another chapter in a stock that refuses to de-rate, is now splitting fund managers as sharply as ever.

Years of beating the bears

CBA's February half-year result beat consensus net profit by 5 percent, helped by low bad debts and a smaller pre-provision beat of 2.5 percent, according to Pendal Group. Margins held up despite management's earlier warning about deposit competition from Macquarie, with strong deposit growth and no change to deposit mix. The stock rose 18.5 percent for the month, according to Perennial Partners and Blackwattle Investment Partners, both of whom described CBA as retaining its title as the world's most expensive bank even as they acknowledged the quality of the franchise. Katana Asset Management noted the rally took CBA back to being the largest stock on the ASX, approaching 12 percent of the index, while Ellerston Capital and Allan Gray both pointed to a price to earnings multiple above 25 times against expected earnings growth of only 3 to 4 percent a year, a contrast Allan Gray drew directly against CSL's sub-15 times multiple for roughly double the growth rate.

Being structurally underweight or short CBA has been a genuinely painful position for a long list of managers. Sage Capital and Regal Funds Management both noted short positions detracting from performance as the stock kept rallying, Auscap Asset Management called it baffling that the major banks traded at near record multiples given emerging mortgage competition from Macquarie, and Milford Asset Management chose to take profit on CBA call options rather than keep riding the rally. By April, Ten Cap's Jun Bei Liu described CBA as a surprising flight-to-quality trade, the only one of the four major banks to rise that month even as recession fears built, on the view the bank is exceptionally well capitalised with ample provisions.

May's crack in the armour

May brought the first genuine wobble. Pendal Group reported CBA's third-quarter trading update missed consensus by 1.5 percent on provisioning top-ups, with capital also surprisingly weak, and flagged that federal budget reforms to negative gearing and capital gains tax would likely hit CBA harder than peers, given its premium multiple and its investor loan book, which had been growing at 1.5 times system. Pendal expects the reforms to slow housing credit growth from around 7 percent toward low single digits. Solaris Investment Management, already significantly underweight, said the changes had materially increased risk to CBA shareholders, and Regal Funds Management's King argued the long-held short position was finally starting to pay off, pointing to reduced forced buying from passive flows as the stock's index weight normalises.

There was a lot of forced buying in CBA, and with the stock now trading below its record highs and becoming a bit smaller in the index, there will be less forced buying, and once that happens, it will return to its fundamentals. The budget was very negative for CBA, so we think it has more downside than any other Australian bank.

— Regal Funds Management, Article, May 2026

Wilson Asset Management made a related but different argument entirely about the capital structure, saying it holds a large underweight in CBA equity but its single biggest portfolio overweight in CBA's own debt. With equity yielding under 4 percent, the fund argued CBA's long-dated fixed rate debt, yielding more than 6 percent, offers a far better risk-adjusted return, and said hybrids would have been the next best option before regulatory changes phase them out.

June's debate: quality premium or bubble

By June the bank still had its defenders. First Sentier Investors likened CBA to a reliable goalkeeper, pointing to strong capital ratios, a deep deposit franchise and chief executive Matt Comyn as reasons to want it anchoring a defensive portfolio. Ten Cap moved to a hold rather than a sell, still calling CBA the best domestic bank and arguing artificial intelligence driven cost efficiencies had barely begun to flow through Australian banking, with the next twelve months potentially marking the start of that, even as budget changes flatten revenue growth.

Others turned more decisively bearish. Market Partners rated the stock a sell on income grounds, arguing a yield a little over 3 percent isn't attractive without stronger growth and that better income opportunities exist elsewhere, despite acknowledging CBA is well placed to benefit from automation given its heavy prior investment in systems. ClearBridge Investments went furthest, arguing CBA has become significantly mispriced as ASX trading volumes have fallen more than 40 percent since before the pandemic, meaning passive index flows now have an outsized effect on the price relative to its true liquidity-weighted weight. ClearBridge argued that against earnings, dividends and discounted cash flow valuations, a fair multiple looks closer to 16 times earnings rather than the roughly 25 times the stock commands.

At 25 times earnings, we think the stock is priced far too richly and should be trading closer to 16 times earnings.

— ClearBridge Investments, Article, June 2026

What happens next looks set to test both camps. For the bears, the budget's impact on housing credit growth and the sustainability of a passive-flow driven valuation are the things to watch. For the defenders, the question is whether CBA's cost advantage, deposit franchise and early lead on AI-driven efficiency can keep delivering earnings surprises large enough to justify a multiple most of the market still considers rich. After years of the bears being wrong, May's trading update miss and the budget reforms are the first data points several fund managers are treating as evidence the tide may finally be turning, even if plenty of others are not yet convinced.