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Is CBA the best ASX banking share?

Is Commonwealth Bank of Australia (ASX: CBA) the best bank on the ASX?

It certainly has a lot of competition for the title. There’s the other big four banks of National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

There are the regional players like Bank of Queensland Limited (ASX: BOQ), Mystate Ltd (ASX: MYS), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Suncorp Group Ltd (ASX: SUN). Foreign banks are also present on the ASX such as CYBG Plc (ASX: CYB). 

For this article I’m not considering investment banks Macquarie Group Ltd (ASX: MQG) and Moelis Australia Ltd (ASX: MOE).

In terms of shareholder returns I think CBA could be described as the best bank. It has always been a solid dividend payer in terms of yield but what I have been pleased by in-particular has been the effort of the bank to grow the dividend over time. Whilst the other big bank dividends have been flat or cut over the past five years, CBA has increased its dividend whilst maintaining a sensible dividend payout ratio.

The bank is also thought of as having a higher-quality loan book compared to its peers, which is useful in good times but particularly in tougher times such as right now. We’ll see how this plays out partly by whether CBA’s loan book suffers from lower mortgage arrears compared to others.

It also has one of the highest net interest margins (NIM) in Australia, being 2.1% at the first-half result, thanks to its size and wholesale funding power with a focus on residential mortgage lending. As an example, NAB’s NIM was 1.79% in its half-year result, showing CBA is earning more for the money it’s lending out.

Foolish takeaway

Commonwealth Bank is trading at 16x FY20’s estimated earnings with a grossed-up dividend yield of 7.4%. Despite CBA being one of the best banks on the ASX, I’m not interested in buying shares because I think the banking sector faces a low growth environment for the foreseeable future and growing competition. I’d only want to consider buying during the deepest part of a recession. 

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of MyState Limited and National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.