Commonwealth Bank of Australia (ASX: CBA) and its shares may be known for being the biggest bank in Australia. The other big S&P/ASX 200 Index (ASX: XJO) bank shares are names like Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
As the biggest banks, and essentially too big to allow to fail, they are required to hold the most amount of capital out of all banks in Australia.
One of the key ways that banks are measured by how strong their balance sheets are, and therefore how capitalised they are, is the common equity tier one (CET1) capital ratio.
Every quarter, banks tell investors what their CET1 ratio is. So we regularly get a view of the bank balance sheets.
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Big ASX 200 bank share CET1 ratios
Seeing as we're focused on CBA shares, we'll first look at what CBA has most recently reported.
CBA's FY22 result ended on 30 June 2022. It said that its CET1 capital ratio was 11.5%, which was a reduction of 160 basis points (1.60%) compared to FY21.
The biggest ASX 200 bank share said that it "maintained a strong capital position after returning $13 billion to shareholders via dividends and [share] buybacks, and absorbing a significant increase in risk weighted assets associated with the interest rate risk in the banking book".
At 30 June 2022, Westpac said that its CET1 capital ratio was 10.75%, down from 11.33% at 31 March 2022. It was lower due to the dividend payment (45 basis points), higher risk-weighted assets (42 basis points) and higher capital deductions.
For the end of June 2022, NAB said that its group CET1 capital ratio was 11.6%. It was 12.5% at March 2022. It was reduced by 54 basis points due to the 2022 interim dividend, 31 basis points due to the acquisition of CitiGroup's Australian consumer business and 19 basis points due to the ongoing share buyback.
For ANZ, it had a group CET1 capital ratio of 11.1%, with the interim dividend impacting it by 41 basis points and broad-based lending growth across the portfolio affecting the ratio by 17 basis points compared to the last update.
What does this mean for the CBA share price?
I think what this shows is that CBA and NAB have stronger, more capitalised balance sheets than ANZ and Westpac.
That extra capital could be used to fund more lending growth, pay stronger shareholder returns, or simply maintain a strong position for those two banks so that they can easily get through whatever happens over the next couple of years.
However, some brokers think that the current CBA share price is overvalued. For example, Morgan Stanley has an underweight rating on the ASX 200 bank share, with a price target of $83. Over the next year, that implies a fall of around 12% from today's price.
