The Commonwealth Bank of Australia (ASX: CBA) share price has risen by 5% over the past year despite significant volatility as interest rates rose, as we can see on the chart below.
Commonwealth Bank has seen a sizeable jump in cash net profit after tax (NPAT) thanks to higher interest rates and an improvement in the bank's net interest margin (NIM). Banks are able to make money on transaction account balances that barely pay any interest to depositors, if any.
The Reserve Bank of Australia (RBA) has pushed the interest rate to 4.1% in a bid to control inflation. There are predictions the interest rate could go as high as 4.85% later this year.
That said, let's consider what the CBA share price might do in FY24.
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Starting off lower
Assuming there's not a large recovery in CBA shares in the last few days of FY23, the CBA share price will be starting much lower than its peak of $111 in February 2023.
Investors are seeing considerable competition in the ASX bank share space these days. With online banking, banks and lenders no longer need a large branch network to be competitive.
The ASX bank share is now on a lower price/earnings (p/e) ratio, which in theory makes CBA more attractive.
Economic struggles ahead?
When CBA released its quarterly update for the three months to 31 March 2023, it reported its quarterly cash profit was up 10% year over year, but it was only up 1% compared to the FY23 first-half average.
The CBA CEO Matt Comyn said:
Many of our customers are feeling the strain of higher interest rates and the rising cost of living. We remain committed to supporting our customers through these challenges. As higher interest rates impact the Australian economy in the period ahead, we expect economic growth to continue to moderate. Despite the challenging global economic outlook, Australia is relatively well positioned given the strength of our banking system, the economic tailwinds from a recovery in population growth and relatively high commodity prices. We remain positive on the medium-term outlook. The strength of our balance sheet means we are well-placed to continue supporting our customers and the broader Australian economy while delivering predictable and sustainable returns to our shareholders.
Can the CBA share price rise?
The first chance that CBA could get to impress is when it reports its FY23 result in August. The (independent) third-party estimates on Commsec suggest CBA will generate $5.97 of earnings per share (EPS), which would be an impressive improvement from FY22.
That projection would put the Commonwealth Bank's share price at more than 16 times FY23's estimated earnings.
However, FY24 is expected to show a 3.5% decrease in EPS to $5.76. I don't see how CBA shares can rise a lot while there's heightened uncertainty, particularly if arrears start increasing. But a small rise is possible.
For me, I think the key will be what happens with arrears and CBA's credit provisions, as this will have a sizeable impact on its profitability.
But the CBA dividend is expected to keep rising in the next few years. The annual payment could be $4.35 per share in FY24, a grossed-up dividend yield of 6.3%, which is pretty good.
