The Commonwealth Bank of Australia (ASX: CBA) share price is up a mighty 20% from its 52-week low in June. Many investors might now be wondering whether the largest Aussie bank is still worth investing in following the recent resurgence.
Could the 111-year-old banking giant still have some youthful exuberance left in it? More importantly, does the potential value creation stack up against the current valuation?
Here are my thoughts.
The good, the bad, and the ugly for the CBA share price
As with most investments, the story isn't exactly black and white for the CBA share price. There are solid reasons to like this banking titan of Australia. However, there are also valid grounds for not being a fan of the $177 billion financial facilitator.
Good side on display
The appealing aspect of CBA is its firm financial positioning compared to the other big four constituents. Based on the latest data, CBA leads the pack in terms of capital buffers, meaning the bank should be more resilient during difficult times.
Keeping it simple, the data points that are worth noting include:
- Common equity tier 1 (CET1) ratio of 11.5%
- Net stable funding ratio (NSFR) of 130%
Another enticing characteristic of CBA is its net interest margin (NIM). This is the difference between the interest paid for deposits and the interest received on loans. Basically, this is the key revenue source for banks — so the bigger the NIM, the better.
At last check, CBA held a NIM of 1.9%, beating out its competition. The next closest is Westpac Banking Corp (ASX: WBC) with a NIM of 1.85%.
Not so good
Where banks get their funding for loans can make a big impact on profitability. Money directly from customer deposits is usually the cheapest form of funding. That's why investors usually like a high deposit funding rate.
Yet, CBA has the lowest deposit funding rate of the big four at 75%. Given CBA's best-in-class NIM, I'm guessing the bank is making use of debt agreed upon at a low-interest rate from some time ago. My concern for the CBA share price is whether its lower deposit funding rate could hurt earnings in the future.
The ugly side of the CBA share price
Unfortunately, there is an ugly side to the CBA share price… At a price-to-earnings (P/E) ratio of around 19 times, the company is certainly not 'cheap'. For context, the industry average hovers around 10 times earnings.
The premium would possibly be justified if CBA profits were growing at a much faster pace than its peers, but they're not. In FY22, the bank's profits grew by approximately 9% — faster than Westpac's, but slower than Australia and New Zealand Banking Group Ltd (ASX: ANZ).
Would I buy CBA shares right now?
Personally, I believe there are more attractive investment prospects elsewhere in the market right now. I still hold a position in CBA due to its exceptional brand and long-term shareholder returns.
However, at the closing price of nearly $105 on Friday afternoon, it's not a buy for my portfolio for the time being.
