The Commonwealth Bank of Australia (ASX: CBA) share price has been an impressive performer in the last few months, rising by more than 13% in six months, as we can see on the chart below.
The tricky thing about rapidly rising share prices is that it can mean a business becomes overvalued (in the shorter term) if the fundamentals and profit generation/potential don't match what's going on.
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Is the CBA share price valuation appealing?
We've seen CBA shares rise, but the profit is not expected to see the same positivity.
Broker UBS has estimated that CBA's earnings per share (EPS) could fall slightly to $5.80 in FY24, which would put the current CBA share price at just under 20x FY24's estimated earnings.
UBS thinks CBA's costs will grow because of cost inflation and spending on IT. However, the broker is more optimistic than the market consensus because credit charges were lower than other analysts expected.
Despite that, in February, UBS downgraded its rating on the ASX bank share to a sell because of a "stretched valuation". It made this assessment when the CBA share price was $114.07. It's currently above that level, so perhaps the broker would say it's even more stretched than it was before.
UBS currently has a price target of $105 on the bank, suggesting the CBA share price could fall by around 8% over the next year.
The bank's dominant market share in retail banking was a "key underpin" to the stock's premium valuation relative to peers, according to the broker. At the current CBA share price, UBS believes there is better value and more upside to be found elsewhere.
What is the bank doing to protect profit?
The broker said proprietary channels were CBA's defence in a price versus volume trade-off against highly competitive industry pricing and growth in third-party distribution. UBS said volume growth could remain challenged.
After reviewing the FY24 first-half result, UBS said that to protect its net interest margin (NIM), CBA had shifted toward investor mortgages – they made up 37% of flow, compared to 28% in December 2022. Interest-only loans were 24% of new business.
UBS noted mortgages remain a key product for CBA, but "the impact of this change strategy on market positioning, capital, credit risk and longer-term profitability remains to be tested".
Foolish takeaway
With interest rates still elevated and inflation remaining at stubbornly excessive levels, it will be interesting to see how CBA's loan book performs over the next year or two. Time will tell what happens. For now, it seems the CBA share price remains stretched.
