The Commonwealth Bank of Australia (ASX: CBA) share price may be materially overvalued according to one leading broker.
As the chart below shows, CBA shares have risen by 17% in the past six months. However, UBS thinks the rise is unwarranted.
The ASX bank share recently reported its FY24 third-quarter result, which UBS provided commentary on to reach its conclusion on where the CBA share price could end up in a year.
Weakening profit
CBA reported cash net profit after tax (NPAT) of $2.4 billion for the FY24 third-quarter, which was down 2% quarter over quarter and down 6% year over year.
UBS noted the net interest income (NII) was largely flat, with a decline of 0.4% with volume growth offset by lower margins from ongoing competitive pressure in deposits and customers switching to higher-yielding deposits.
Non-net interest income was down 6% quarter over quarter, driven by lower markets and dividend income. Operating expenditure increased by around 3% in the quarter, reflecting higher amortisation and staff costs.
The loan impairment charge was $191 million, representing 8 basis points (0.08%) of its lending portfolio, though arrears are increasing.
UBS is expecting further increases in arrears because of continued pressure on real household disposable income.
But, on the positive side, UBS said the CBA FY24 funding position remains "sound" with around $20 billion of new long-term wholesale funding issued in the 2024 financial year to date.
Around $750 million of the previously announced $1 billion on-market share buyback is remaining.
Is the CBA share price headed to $100?
UBS notes that defending the profitability of its existing loan book remains a "key imperative for management." The bank is using its "proprietary distribution channels to defend and drive volume growth in mortgages," which has seen CBA grow its loan book at 0.7x the system. In other words, it's slightly losing market share.
The broker suggests that the FY24 fourth quarter could be softer on the revenue side, though the bank is showing "good cost discipline and management."
UBS points out that CBA shares are trading at around 2.5x FY25's estimated book value, which is elevated for the banking sector.
The broker's price target for the CBA share price is $105, which implies a possible fall of around 10% from where it is today.
At the current valuation, the CBA share price is trading at 21x FY25's estimated earnings, which is far higher than the price/earnings (P/E) ratio of other major ASX bank shares.
