The Commonwealth Bank of Australia (ASX: CBA) share price hasn't moved much compared to the price at the start of 2023. It's only up by 1% in 2023, while the S&P/ASX 200 Index (ASX: XJO) has risen 5% this calendar year.
The ASX bank share has been fairly resilient in terms of its profit and dividends in the last few years. In this article, I'm going to look at whether the business could be a good buy today.
Profit growth delivered
One of the main things that investors want to see from their business is profit growth, and CBA managed to deliver improved financial numbers.
In the FY23 result, CBA's statutory net profit increased by 5% to $10.2 billion, while cash net profit grew by 6% to $10.16 billion. The pre-provision profit, being the underlying performance of the business, saw a 19% increase to $15.6 billion.
A sizeable part of the profit growth came from the fact that its net interest margin (NIM) improved year over year from 1.90% in FY22 to 2.07% in FY23. This means it's making more profit on its lending than last year, which was because of the rising interest rate environment according to CBA. During FY23 it passed on the RBA rate hikes more quickly to borrowers than savers. CBA is also making more profit on customer dollars sitting in the zero-interest transaction accounts.
The ASX bank share benefited from the fact that its loan book has grown – in FY23 its home lending increased by 5% (or $26.2 billion), while business lending increased 11.4% (or $14.5 billion).
Problems arising for CBA shares
I'd suggest that the ultra-low level of banking arrears seen after interest rates went to almost 0% is going to change. I'm not at all predicting a huge jump in arrears, but I think it's logical to expect that bank arrears will worsen with interest rates likely to stay elevated for some time.
The RBA is still expecting inflation to be above 3% by the end of 2024, so interest rates may still be above 3% until then as well.
Why is this important for CBA? It's because the ASX bank share has to provision for a potential increase in bad debts – this loan impairment provision increase hurts profit. In FY23 the total impairment provision increased by $603 million, which is why net profit decreased at a much slower pace than pre-provision profit.
CBA's NIM may also have peaked because of the effect of banking competition. The ASX bank share disclosed in its FY23 results that "monthly spot margins peaked in late 2022 and we continue to manage headwinds". CBA's FY23 second-half NIM was 5 basis points (0.05%) lower than the FY23 first half.
Is the CBA share price a buy?
Businesses can be opportunities when their share prices fall due to temporary difficulties.
However, I don't think that banking competition is going to go away. With online banking, competitors don't need a national branch network to be competitive – look at how Macquarie Group Ltd (ASX: MQG) has grown its market share.
The price/earnings (P/E) ratio doesn't seem that appealing, CBA shares are valued at 18 times FY24's estimated earnings according to (independent) estimates on Commsec. Compare that to the National Australia Bank Ltd (ASX: NAB) share price which is valued at 13 times FY24's estimated earnings.
Looking at the potential passive income, FY24 Commsec estimates suggest CBA could pay a grossed-up dividend yield of 6.3%. Meanwhile, NAB shares could pay a grossed-up dividend yield of 8.3%.
I don't think CBA can deliver impressive profit growth in the current environment. The other ASX bank shares like NAB seem better value and could provide larger dividends.
