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Is the CBA share price a buy?

Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy? The big ASX bank continues to grind higher after the initial COVID-19 share market selloff.

The CBA share price is still down 20% from the pre-COVID-19 peak in February 2020. But since 23 March 2020 it has actually risen by 33%. Not a bad return from one of Australia’s biggest businesses.

The recovery

I can see why the CBA share price has gone up so much over the past few years. Not only is Australia in a much better COVID-19 situation than most other countries, but the economic outlook looks a lot better than it did a few months.

Remember when it turned out that jobkeeper had been overestimated by tens of billions of dollars

A better COVID-19 situation makes for a stronger economy, which in turn benefits CBA.

The big ASX bank is leveraged to the strength, or weakness, of the economy. CBA lends to thousands of households and business across the country. If difficulties pop up then CBA’s loan book will feel it.

Will CBA and its share price face more pain?

It’s very hard to predict how the economy and share price will perform over the next couple of months. You can only make an educated guess. Share prices of companies should follow earnings over the longer-term. CBA has already warned that its FY20 profit faces a hit from increased credit provisions from potential COVID-19 impacts. Investors were expecting that, it’s why the share price fell in February and March. 

In the quarterly update to 31 March 2020 the bank said that it was adding a loan loss provision of $1.5 billion for COVID-19. That’s a big number, but in terms of its total loan book it was still a low number. At 31 March 2020, the ratio of home loan consumer arrears of more than 90 days was 0.63%, which was lower than the ratio at both March 2019 and March 2018.

The CBA share price could come under more pressure due to the ongoing Victorian lockdowns and perhaps if the NSW outbreak starts spreading out of control.

The net interest margin problem

A key measure of profitability for the banks is the net interest margin (NIM). It measures the difference between the cost of funding and the interest rate it charges its borrowers. The RBA, just like other central banks, has reduced the official interest rate. The Australian rate is now at a record low of just 0.25%.

CBA isn’t going to charge customers for holding cash in their transaction and other accounts, so each reduction of the interest rates lowers CBA’s NIM and makes it harder to maintain profit. This could therefore hinder the CBA share price.

How long will the CBA NIM be under pressure? RBA governor Phil Lowe said that interest rates will be low for years, though the rate is unlikely to go negative.

Is it a good time to buy shares?

I think CBA is a higher quality bank than the other ASX banks of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Group (ASX: ANZ). It has a stronger balance sheet and it’s less exposed to business loans. Households have received a large amount of support during the global pandemic so far.

CBA shares are still cheaper than it was prior to COVID-19 exploding. I don’t know how much dividends it’s going to pay over the next 12 months. Using the trailing payments, it has a grossed-up dividend yield of 8.5%. But the upcoming dividends could be halved, or more, in the next two results so I wouldn’t buy CBA for short-term dividends right now.

Today’s CBA share price doesn’t seem cheap compared to most of the first half of FY20. I would wait for a better share price before buying CBA shares. There could be another selloff later this year and it doesn’t seem like great value to me right now with the potential negative outcomes for the economy. 

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.

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