Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy? The ASX bank sector has been roaring back to life in recent weeks.
Since 25 May 2020 the CBA share price has soared higher by 22%. The market seems to think that the $60 billion jobkeeper overestimation means the economy will be in much better shape. That jobkeeper estimation error was due to overly pessimistic forecasts according to reporting by the Australian Financial Review.
The performance of CBA's earnings and share price is largely linked to the Australian economy. Indeed, every ASX bank relies on a solid national economy. CBA is exposed to the same sorts of systematic risks as Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
Where to now for the CBA share price?
The CBA share price is still down by around 19% from the level at 21 February 2020. So it's not as though investors are pricing in a complete recovery for CBA yet.
The major bank made a $1.5 billion additional credit provision for the potential impacts of COVID-19 in its third quarter update.
If CBA's provision is enough to account for all of the potential damage then it may in a much better position than investors were fearing a couple of months ago.
However, there's one big factor I'm wary of. The official Australian interest rate is now incredibly low. This will likely cause a negative hit to CBA's net interest margin (NIM). The NIM is important because banks generate a lot of their overall profit from the money they lend out.
I'm not sure how much higher CBA's share price can go over the next couple of months. COVID-19 will cause a sizeable hit to the profit this year.
It will be interesting to see what CBA does with its dividend. ANZ and Westpac decided to defer the dividend. NAB decided to pay a much smaller dividend. After the recent strong share price increase for CBA, I'd be inclined to go for other shares first.
