The Commonwealth Bank of Australia (ASX: CBA) share price has risen an extraordinary 27% in a year. Could it be a buy?
It’s an incredible run because not only has it smashed the market – the All Ordinaries (ASX: XAO) is only up by 7% in the last year – but it’s running counter to economic conditions.
Weakening profits
The update for the three months to 31 March 2024 showed the ASX bank share made $2.4 billion of cash net profit after tax (NPAT)< which was down 3% compared to the FY24 first half quarterly average, and down 5% year on year.
It’s surprising to me when a share price steadily climbs – not just a one-off readjustment – as a company’s profit is falling.
CBA’s third quarter update showed lower profit margins amid competition, while arrears are increasing. The bank reported a loan impairment expense of $191 million, with provisions “slightly higher”.
While the bank said portfolio credit quality remained “sound”, there are “moderate increases in both consumer arrears and corporate troublesome exposures”. The percentage of home loan arrears that are more than 90 days overdue reached 0.61% at March 2024, up from 0.44% in March 2023.
Does the CBA share price offer value?
It has risen impressively but it’s seen as one of the most expensive banks in the world, if not the most expensive. That can be measured either by looking at its price/earnings ratio (p/e ratio) or what level its balance sheet is valued against the CBA market capitalisation.
According to CMC Markets, the CBA share price is valued at 22 times the estimated earnings for FY25 and it’s trading on a price to book (balance sheet) ratio of close to 3.
As a comparison, the National Australia Bank Ltd (ASX: NAB) share price is valued at 16 times the estimated earnings for FY25 and it has a price to book ratio of 1.8 (which is still elevated compared to history for the global banking sector).
The large increase in the CBA share price has led to a suppressed dividend yield. CBA shares may now only have a fully franked dividend yield of 3.5% according to CMC Markets.
I don’t believe CBA shares are appealing, with slow earnings growth (at best) predicted for the next few years. There are plenty of other ASX dividend shares that can offer stronger dividend income, more growth and potentially more reliability in my opinion. Don’t forget, CBA was one of the shares to cut its dividend during the COVID period.
