Commonwealth Bank of Australia (ASX: CBA) shares are rising, is it time to jump on the major ASX bank?
What has happened?
Over the past three months the CBA share price has risen by 30%. That’s a strong movement considering it started in September – many businesses have seen their share prices recover much sooner than that. However, just because something has gone doesn’t mean it will keep rising. It may have just been a one-off re-rating.
Plenty of the businesses that were hurt because of COVID-19 impacts have been going up after the world learned about how (pleasingly) effective the vaccines from Moderna and BioNTech-Pfizer are.
Big banks like CBA were hit hard earlier this year and have taken a while to recover.
Things are looking up though. Several months ago there were questions about whether the banks had even provisioned enough for this difficult period and there were large numbers of borrowers that needed to go on a payment holiday.
But the number of people and businesses on those payment holidays has been steadily reducing.
CBA said in its first quarter update that at 31 October 2020, it had 46,000 home loans in deferral (at a balance of $19 billion), down from 125,000 loans (with a balance of $49 billion) at June 2020. Whilst the dollar amount of what remained was still large (10 times the quarterly statutory net profit), the falling number is encouraging.
What now?
CBA (and the other banks) are not out of the woods yet. There are still some sectors of the economy that are doing it tough, such as education and tourism.
The very-important net interest margin (NIM), which tells investors how much profit a bank makes from lending out money (after funding costs) is still low and dropping.
However, the property market across most of the country is booming. This should help reduce the danger of a large number of loans going bad. Even if the property owner has to sell a property because of cashflow issues, rising prices should mean that CBA is able to collect the loans back.
In terms of the dividend, CommSec’s numbers put the CBA dividend estimate at $3.20 per share in FY22, which equates to a fully franked dividend yield of 3.85%. I’m not very excited about that yield considering the environment banks are operating in right now. I don’t think investors are being compensated enough for the risks. In other words, I think the CBA share price looks fully priced.
There are other ASX dividend shares that I think would offer more growth and more reliability over the long term like Brickworks Limited (ASX: BKW) and Magellan Financial Group Ltd (ASX: MFG).
