The Commonwealth Bank of Australia (ASX: CBA) share price is currently above $95. Is it a buy or has the big four ASX bank gone too high to be good value?
It was only yesterday that CBA released its FY21 third quarter trading update to investors.
Considering it rose in reaction, the market appeared to be happy with how things are going. Banks are one of the ASX shares that may not be negatively affected by rising interest rates.
CBA reported that its cash net profit from continuing operations was approximately $2.4 billion for the quarter, up 24% from the first half quarterly average, mainly driven by lower loan impairment expenses.
The big bank revealed income grew 2% with above system core volume growth, improved margins and higher non-interest income which was partly offset by the impact of two fewer days. CBA was pleased that its business lending grew by more than three times the system.
Expenses grew by 1% excluding remediation costs, or 2% including remediation costs.
The bank explained that the loan impairment expense was significantly lower in the quarter thanks to an improved economic outlook, which resulted in a reduction in collective provisioning levels. Despite that, CBA’s provision coverage is still strong and it continues to reflect a cautious approach to managing risks as the economic recovery from the pandemic continues.
CBA’s balance sheet continues to strengthen. The common equity tier 1 (CET1) capital ratio improved by a further 10 basis points to 12.7% despite the payment of the interim dividend.
The CBA CEO Matt Comyn spoke about the credit quality of its loan book:
Credit quality across our lending portfolios remained sound. While it is pleasing to see that the vast majority of customers have smoothly transitioned from the bank’s COVID-19 temporary loan repayment deferral program as it concluded in March, we continue to offer ongoing assistance to those in need.
Is the CBA share price a great opportunity?
The consensus of brokers suggests it isn’t.
Morgans has set a price target of $73 for Australia’s biggest bank – suggesting a sizeable decline over the next 12 months. The quarterly profit beat the broker’s expectations, though remediation costs were a detractor to that. Whilst the broker acknowledges that CBA is high-quality, it feels the valuation has gone too far. On Morgans’ numbers, the CBA share price is valued at 19x FY21’s estimated earnings.
Other brokers aren’t so negative after the third quarter update. Credit Suisse has stuck a price target of $95 on CBA’s shares. The broker is expecting a major share buy-back program – more than $10 billion – over the next couple of years.
However, broker Morgan Stanley thinks that CBA (and other banks) will continue to be conservative with capital despite the improving environment. The broker also thinks that the dividend payout ratio isn’t going to go too high either. Morgan Stanley currently has a price target of $83 on the big four ASX bank.