Why CBA shares could see their greatest strength become a weakness

Commonwealth Bank of Australia (ASX: CBA) shares have held up relatively well this year.

Despite concerns over trading conditions in the banking sector, Australia’s largest bank’s shares are trading within sight of their 52-week high.

Unfortunately, one leading broker doesn’t believe this will last and has urged investors sell the bank’s shares this morning.

Who is bearish on CBA shares?

According to a note out of Citi, its analysts have reiterated their sell rating and $82.50 price target on the bank’s shares.

This suggests that its shares could fall approximately 22% to a level not seen for over two years if the broker is on the money with its recommendation.

Citi highlights that CBA shares have defied what sellside analysts have been predicting for some time and continued to charge higher. Ahead of earnings season, it is now asking if “the sellside [will] finally get it right?”

What is Citi saying?

Citi notes that CBA’s strength has been its leadership position in the home loan market. However, with interest rates rising fast, the broker believes that momentum is now shifting to the business lending side of things, which CBA notoriously has limited exposure to. It explains:

Investors have been rewarded for holding onto their CBA positions so far, despite continued sell-side bearishness. Can this outperformance continue? Historically, CBA has benefited from its market leading retail franchise. However, the last 12 months have seen a profound shift vs the prior decade. Business credit growth is now above household credit growth and retail banking is at the center of competitive dynamics.

And while the broker acknowledges that CBA is being more rational with respect to mortgage competition, it doesn’t believe it will have a major impact on earnings in the near term. As a result, it feels that CBA shares don’t deserve to trade at such a large premium to the rest of the big four. It concludes:

While CBA has recently started incorporating pricing discipline in mortgages, the effect of these actions will likely not materialize in this quarter. In fact, 4Q will likely be a much more difficult quarter as savings deposit competition further hits the margin. Investors should evaluate whether a large valuation premium vs peers is still warranted, when trends and returns are starting to converge in the sector.

CBA is scheduled to release its full-year results next week on 9 August.