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Speaker 1: Welcome to Ask Fear and Greed when we answer questions

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Speaker 1: about business, investing, economics, politics and more. I'm Michael Thompson

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Speaker 1: and hello Sean Aylmer.

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Speaker 2: Hello Michael, Sean.

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Speaker 1: Today's question is all about Commonwealth Bank, Australia's biggest company,

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Speaker 1: and goodness me, we've talked about it a lot recently,

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Speaker 1: and fair enough, it just keeps setting new records. We

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Speaker 1: keep talking though about Commonwealth Bank being super expensive, which

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Speaker 1: is a that is a technical term. It's an official

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Speaker 1: technical expensive super expensive. But what's that actually mean? What

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Speaker 1: are you comparing it to when we say that it

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Speaker 1: is expensive? Can you explain this please?

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Speaker 2: Yes. So yesterday the Commonwealth Bank hit a new record

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Speaker 2: high of one hundred and seventy six dollars and forty

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Speaker 2: six cents a share, So that in itself doesn't mean

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Speaker 2: much unless you can compare it to AAN zed Nason,

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Speaker 2: Australia Bank and Westpac. You do that by using something

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Speaker 2: called the price. Well, there are a number of methods,

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Speaker 2: but I commonly used one is the PE ratio, the

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Speaker 2: price to earnings ratio, and that's the share price compared

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Speaker 2: to earnings. That makes sense, yep, doesn't it? Normally? Companies

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Speaker 2: with a lot of debt, like banks don't trade on

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Speaker 2: high price to earning ratios PE ratios. In fact, in

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Speaker 2: my day as a banking writer, like fifteen times twelve

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Speaker 2: to fifteen times PE was about normal. The reason that

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Speaker 2: banks don't trade on anything. High tech companies can trade

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Speaker 2: on twenty five point thirty. Some of the big growth

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Speaker 2: companies trade a lot more than that. Problem with the

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Speaker 2: banks has got lots of debt, so I've given them

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Speaker 2: a deposit. They owe me that money. That means they

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Speaker 2: trade on these lower PE So you with me so far.

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Speaker 2: So we're measuring banks on a price to earnings ratio.

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Speaker 1: I want to know what the ratio is for Commonwealth Bank,

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Speaker 1: and I feel like I'm just kind of jumping ahead.

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Speaker 2: Now. You're trying to give me the A and z's

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Speaker 2: ratio is about thirteen times earning. So it's a share

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Speaker 2: price but thirteen times historic earnings National Australia Bank, Westpac

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Speaker 2: sixteen times earnings, a bit more expensive Commonwealth Bank.

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Speaker 1: I love the way you're building suspense. You were not

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Speaker 1: letting me jump ahead to this' I'm going to make

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Speaker 1: you wait.

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Speaker 2: We're doing it again, ain zed thirteen times National Australia

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Speaker 2: Bank Westpac sixteen times, Commonwealth Bank thirty times, earnings snappers snappers.

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Speaker 2: If you listen to the market analysts, many of them

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Speaker 2: say the Commonwealth Bank is the most expensive bank in

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Speaker 2: the world. Now, there could be reasons for some organization

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Speaker 2: being more expensive than others, like that comes back to

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Speaker 2: management and strategy, all sorts of things. What is quite

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Speaker 2: remarkable with the Commonwealth It is one of four big banks.

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Speaker 2: They all have triple A ratings, they're all considered extremely

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Speaker 2: good organizations. Yet common Wealth Bank thirty times, NAB Westpact

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Speaker 2: sixteen times, ain Z thirteen times. On that metric alone,

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Speaker 2: you would think ain Z is very cheap and Commonwealth

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Speaker 2: Bank is extremely expensive. A lot more to do it

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Speaker 2: with it, And if you're going to buy bank shares,

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Speaker 2: go and get some financial advice. That's what I'd recommend to.

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Speaker 2: Not listen to me. But your question was what do

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Speaker 2: you mean by Commonwealth Bank being expensive? That's what I mean.

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Speaker 1: Can it get more expensive? This is the big question,

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Speaker 1: like can it just keep on going?

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Speaker 2: So if you want to look under the hood at

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Speaker 2: Commonwealth Bank or any of the banks, they're full of ratios.

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Speaker 2: So the net interest margin we talk basically a profit margin.

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Speaker 2: Commonwealth Bank is good, but it's not great compared to

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Speaker 2: the other three banks. The cost to income ratio is

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Speaker 2: like expenses as percentage of total income gain comme. Wealth

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Speaker 2: Bank good but not usually better than others. Bad debt

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Speaker 2: ration it fits into that as well. It's the reason

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Speaker 2: it's so expensive is that people really have bought the

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Speaker 2: story that it's safe. Yeah, Overseas investors wanting to invest

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Speaker 2: in Australia think well, what's the biggest company. It's a

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Speaker 2: bank that looks pretty safe. We'll throw our money into

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Speaker 2: that great dividend player as well. So if you bought

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Speaker 2: this stock at one hundred bucks a year ago and

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Speaker 2: you're getting, you know, one hundred and seventy six bucks,

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Speaker 2: now you're pretty happy. And it just seems to have

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Speaker 2: had this momentum for six months or so. Now having

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Speaker 2: said all that, people do say it's expensive, and it

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Speaker 2: is expensive, and.

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Speaker 1: Now we understand why it's expensive.

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Speaker 2: That's right, I think, and I just.

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Speaker 1: Love the storyteller in you came out and you were like,

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Speaker 1: I'm going to make you I'm going to drag this out.

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Speaker 1: You were certainly not leading with the headline that you

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Speaker 1: buried the lead. Didn't you bury the lead?

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Speaker 2: That's exactly right.

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Speaker 1: That was fantastic. Thank you Sean for answering that one.

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Speaker 2: Thank you Michael. Now I remember.

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Speaker 1: If you've got something that you would like to know.

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Speaker 1: It could be about banks, it could be about anything really,

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Speaker 1: then send through your question on thekein Instagram, Facebook, or

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Speaker 1: at fearangreed dot com dot au. I'm Michael Thompson and

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Speaker 1: this is ask Fear and grad