The Commonwealth Bank of Australia (ASX: CBA) share price has slid during February, it's down around 8%. That compares to a drop of less than 4% for the S&P/ASX 200 Index (ASX: XJO). In other words, the ASX bank share has fallen twice as much.
Is the fall justified? That's for each investor to decide, but I'm going to look at some of the main elements that happened during February.
As the biggest bank in Australia, changes in the Reserve Bank of Australia (RBA) interest rate can have a large flow-on effect. At the start of the month, the RBA increased the cash rate target by another 25 basis points (0.25%) to 3.35%.
Competition intensifies
One of the most important factors for banks is how much profit they make from lending. While the interest rate has increased and boosted lending margins – as banks have generally passed on interest rate hikes to borrowers faster than savers – there is now fierce competition for borrowers who are refinancing. This could be a key pain factor for the CBA share price.
The CBA CEO Matt Comyn recently said at its FY23 half-year result that the market was being "irrational" according to reporting by the Australian Financial Review. The newspaper quoted Comyn, who said:
The home lending market is undergoing a period of extreme change and intense competition.
Cash backs are growing in size and prevalence, and we estimate that banks have deferred costs relating to cash backs of over $1 billion. This figure has increased almost 50% in the past two years, and combined with a substantial increase in commissions over the same period, creates a margin headwind that will flow unevenly across the market.
This could mean that the bank's net interest margins (NIMs) may not be as strong as investors had previously expected.
Funding costs are increasing. CBA recently boosted its goalsaver account bonus interest rate – one of the main savings accounts – by 0.75% per annum to 4%. In other words, that could represent a noticeable hit to the NIM.
Is the CBA share price a buy?
Perhaps it's not surprising that the CBA share price has suffered amid the current situation.
The CBA result for the first six months of FY23 was solid. It saw cash net profit after tax rise 9% to $5.15 billion, while pre-provision profit grew by 18% to $7.82 billion.
It revealed a NIM of 2.10%, which was up 23 basis points half over year and up 18 basis points year over year. CBA noted that the recovery in margins was due to the rising rate environment, but it was partly offset by competitive pricing pressure.
The profit growth enabled CBA to increase its interim dividend per share by 20% to $2.10 per share.
It finished the period with a common equity tier 1 (CET1) capital ratio of 11.4%.
Despite the fall in CBA share price, it's priced at 17 times FY23's estimated earnings according to Commsec. That still seems pricey to me, so I wouldn't be looking to buy new shares, particularly with the potential rise in arrears not coming through yet. There are other ASX bank shares that I prefer more.
