Could the Commonwealth Bank of Australia (ASX: CBA) share price be a buy right now? In this article I’m going to outline a couple of things to think about.
Firstly, how is the business performing?
FY21 result
Commonwealth Bank reported that in FY21 it generated $8.65 billion of cash net profit after tax, up 19.8% on FY20. Statutory net profit jumped 19.7% to $8.84 billion.
Operating income rose 1.7% to $24.16 billion, whilst operating expenses increased 3.3% to $11.36 billion. Excluding remediation costs, operating expenses rose 2%.
There are a couple of key statistics to consider when looking at banks.
NIM and loan provisions
The first is the net interest margin (NIM), which is how much profit it makes on the loans it gives out, compared to the cost of the funding of that loan (like deposits). Whilst the economic picture is improving, CBA’s net interest margin (NIM) continued to edge lower. CBA’s overall NIM declined 4 basis points (0.04%) to 2.03%. The bank said that the NIM declined because of higher liquid assets (eg deposits in savings accounts) and the ongoing impact of a low interest rate environment. A falling NIM means the bank is less profitable on the loans and funding it has.
The second area to consider is the loan provision expense. In FY20 the CBA share price was hammered as investors worried about bad debts. In FY21 the loan impairment expense was down 78% to $554 million. CBA explained that this decrease reflected an improvement in economic conditions and outlook. But it has still maintained a strong provision coverage ratio of 1.63%, reflecting the economic uncertainty from the continuing impacts of COVID-19.
Shareholder returns
CBA can’t directly influence the CBA share price, but it can do things like paying shareholders money to make it more appealing. The total FY21 dividend per share was $3.50, an increase of 17% on FY20.
The bank announced a $6 billion off-market share buy-back. CBA said that its strong capital position and progress on its strategy means it’s well placed to support customers and manage ongoing uncertainties, while also returning a portion of excess capital.
My thoughts on the CBA share price
I really think CBA is one of the best banks in the world to be a shareholder, with a focus on strength and quality. However, I just can’t see how the bank can generate a high level of growth over the long-term. It’s already so big and this low interest rate environment makes things tricky.
If I were already a long-term shareholder, I’d be happy to hold. I prefer to the others of National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ). However, I think there are other ASX dividend shares that might be better ideas for income.
