The Commonwealth Bank of Australia (ASX: CBA) share price has been rising in recent weeks. Can the ASX bank share finish the year with a Santa rally and reach $110?
Ultimately, anything is possible, and no-one has a crystal ball. Investors shouldn't worry too much about what a share price might do in a short-term period, like the next month or so to Christmas.
It's worth pointing out that if something has risen it doesn't mean it's going to keep rising, particularly if it's pushing the price/earnings (P/E) ratio towards an unsustainable level.
Investors seem to like what they saw in the recent quarterly update.
Earnings recap
In the three months to September 2023, it generated cash net profit after tax (NPAT) of $2.5 billion, which was flat on the FY23 second-half quarterly average and up 1% on the prior comparative quarter. Profit strength is normally a key factor for the CBA share price.
Home lending only increased by 3.1% compared to the three months to September 2022, which was only 0.7 times the growth rate of the overall system.
CBA said that its operating income was flat, with difficulties caused by lower net interest margins (NIMs) from competitive pressures. Operating expenses went up 3%, reflecting higher staff costs from wage inflation and higher amortisation, partly offset by productivity initiatives.
The bank said its strong balance sheet settings were maintained – it had a common equity tier 1 (CET1) ratio of 11.8% at September 2023, which is around $7 billion surplus to what the APRA minimum regulatory requirement is.
The CEO Matt Comyn said that the Australian economy remains "resilient", supported by "low unemployment and strong population growth." But, he also acknowledged that "higher interest rates are resulting in slowing growth and consumer spending, with pressure on some households and businesses."
Where now for the CBA share price?
Writing on The Bull, Jabin Hallihan from Morgans thinks the ASX bank share is a sell because it's "relatively expensive on investment metrics" compared to banks like ANZ Group Holdings Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). He acknowledged that the capital position "remains strong" but some borrowers may struggle to meet the rising mortgage repayments.
The broker UBS currently has a neutral rating on CBA shares, with a price target of $99.95. A price target is where the broker thinks the share price will be in 12 months. In other words, UBS is suggesting the CBA share price is headed downwards from here. UBS said it was neutral on the bank on valuation grounds.
What is the valuation? On UBS' numbers, the CBA share price is valued at 18 times FY24's estimated earnings.
