Could Commonwealth Bank of Australia (ASX: CBA) shares be a safe bet to invest in now?
The CBA share price has been rising since September and it has been a particularly strong performer since the start of November.
COVID-19 impacts
CBA, along with all other listed banks, increased their credit provisions in their financial accounts during 2020. Loan holidays and loan interest rates have made it easier for borrowers to stay afloat during this difficult time.
But things are starting to look better. The number of borrowers still on a payment holiday is thankfully still dropping all the time. The Australian housing market continues to strengthen, the Australian economy is recovering, APRA has said bank dividends can be higher and bank share prices are growing.
FY21 first quarter
CBA reported it generated $1.9 billion of statutory net profit after tax in the FY21 first quarter. Its cash net profit was $1.8 billion, which was down 16% on the same period last year.
Its income was stable compared to the quarterly average of the second half of FY20. CBA said there was core volume growth which helped to offset lower margins.
In terms of the net interest margin (NIM), it was even lower than the FY20 second half because of lower earnings on deposits and capital from lower interest rates, unfavourable lending margins (with lower margin fixed rate home lending) and higher liquid assets.
However, since June 2020, the home loans that were in arrears over 90 days decreased from June 2020’s rate of 0.63% to September 2020’s rate of 0.55%.
CBA’s common equity tier 1 (CET1) capital ratio was 11.8% – this was an increase of 20 basis points compared to June 2020 after the payment of the second half dividend. It remains unquestionably strong.
Is it a good time to buy CBA shares?
Things are looking better for CBA. It doesn’t seem like the big bank is going to have to increase its credit provisions much, if at all.
But valuation itself can be a risk. The CBA share price has gone up around 33% since the end of September 2020. At the current CBA share price it’s valued at 21 times the 2021 financial year’s estimated earnings and 18 times the estimated earnings for the 2023 financial year.
I think CBA shares look pretty expensive now, particularly how low interest rates are (which is affecting the net interest margin).
In the financial sector, I’d much rather invest in a business like Magellan Financial Group Ltd (ASX: MFG) which has better growth prospects and and doesn’t have a huge balance sheet.
