The Commonwealth Bank of Australia (ASX: CBA) share price has almost reached $100. Can it go even higher than that?
It has been an amazing recovery for the big four ASX banks over the last 12 or so months.
Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) are all different banks, but they end up performing roughly the same. Though Westpac has been facing a few more issues recently.
But CBA seems to be a cut above. It has been a higher-quality bank. The balance sheet has remained in a strong position throughout COVID-19.
Its balance sheet is in such a strong position that its common equity tier 1 (CET1) ratio rose to 12.7% at 31 March 2021. That was a 10 basis point (0.10%) increase over the quarter despite the payment of the FY21 interim dividend.
Is that a good thing for the CBA share price?
You could say that CBA is holding too much capital and this is lowering profitability.
But there is widespread market expectation that CBA is going to return some of that excess capital to shareholders through higher dividends and perhaps a share buyback.
This expectation could be one of the key reasons why the CBA share price has done so well in recent weeks.
Can it reach $100?
There’s nothing stopping it from getting there. Conditions continue to improve for the banks and the bad debt situation is improving as house prices climb and economic activity returns.
The profit that CBA is reporting is recovering. The FY21 third quarter cash net profit saw a 24% increase compared to the FY21 first half quarterly average. That quarterly cash profit was $2.4 billion.
Looking at CommSec’s numbers, at $90 the CBA share price was priced at 20 times the estimated earnings for the 2021 financial year. At $100 it would be priced at 22 times.
I think that CBA shares are looking very pricey, for a bank, at these levels. It’s a high quality business for sure, but no business is a buy at any price – including banks. Let’s look at another bank – NAB is priced at 16 times the 2021 estimated earnings. CBA should be priced a little higher than NAB, but probably not this much.
There are other ASX dividend shares that I’d rather be looking at with these prices.