Commonwealth Bank of Australia (ASX: CBA) shares continue to lag behind 2 of the other 3 major banks. Both National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking GrpLtd (ASX: ANZ) have risen by ~32% from 23 March. Yet CBA shares are up only ~27%. This places it on equal footing with beleaguered Westpac Banking Corp (ASX: WBC). A bank undergoing investigation by the ACCC.
Personally, I believe the CBA share is worth further investigation.
Setting up for growth
On 15 March CommBank announced it would be selling 55% of Colonial to US private equity firm KKK for AUD$1.7 billion. This provides additional capital for the bank at a time when it has set aside $1.5 billion for impacts from the coronavirus. This deal caused ASIC to pursue civil proceedings against the bank for issues arising from the Royal Commission.
However, I do not think CommBank shares will be impacted too much. The bank indemnified KKK against all impacts from the Royal Commission in the purchase arrangement.
Secondly, and far more exciting is the bank's entry into the buy now pay later (BNPL) market.
CommBank announced it was to launch Swedish private fintech, Klarna in Australia on 30 January. A plan later derailed by the COVID-19 outbreak. CommBank holds a 5.5% stake in Klarna, increased from its original 1.8% holding. The companies will jointly fund and have 50:50 ownership rights to Klarna's Australian and New Zealand business. It is worth mentioning that Klarna is the originator of the BNPL approach and is currently the largest in the world.
CommBank is the nation's largest provider of digital payments services. This means the Klarna BNPL service can be immediately available across Australia. This is a significant threat to Afterpay Ltd (ASX: APT) as the dominant player in the Australian market. However, it will also threaten any other BNPL that has a service offering purely in Australia.
Robust position
CommBank was the first Aussie bank to signal its intention to cut back on COVID-19 support by 30 June. CommBank will likely be the first of the majors to start to see loan defaults for those customers unable to pay. In addition, the bank is the largest provider of home loans and business loans in Australia. Nonetheless, it has already made a $1.5 billion provision to pay for defaults.
In addition, Colonial is more likely to increase earnings while managed as part of the core business of a private equity firm.
CBA shares are presently trading at a price to earnings (P/E) ratio of 12.4. At the time of writing, based on the current price, CBA shares have a trailing 12-month dividend yield of 6.27%. Moreover, while dividends are currently deferred, I cannot see the banks reducing or permanently cancelling dividend payments. It is the core reason why many funds hold the banks.
Foolish takeaway
I think our largest bank is good value for money right now. It has set itself up for growth in the near future and is managing its response to the coronavirus in a very fiscally responsible manner. At the current price I believe investors will see solid share price growth in the medium term, as well as securing a solid dividend payment once they recommence.
