The Commonwealth Bank of Australia (ASX: CBA) share price has risen by close to 30% in the past year, as shown on the chart below. After such a strong year, investors may be wondering whether the ASX bank share can go on another run.
The focus on inflation and interest rates has dominated discussions regarding banks in the last couple of years. The performance of CBA's net interest margin (NIM) and loan arrears could be key moving forward into the 2025 financial year.
Keep in mind that CBA's FY25 first half involves the last six months of the 2024 calendar year.
First, we'll examine how the bank sees the outlook.
Challenges are building
When CBA released its FY24 third quarter update, the CEO Matt Comyn said:
We have continued to focus on supporting our customers and communities, investing for the future and providing strength and stability for the broader economy. We know that many Australians are feeling under pressure due to a higher cost of living, and we are here to support those customers that need our help.
We have continued to strengthen our balance sheet to ensure we remain well positioned to support our customers, communities, and economy. All Australians benefit from strong and stable banks.
The fundamentals of the Australian remain sound. Unemployment remains low, supported by business and government investment and elevated terms of trade. We recognise that all households are feeling the impact of higher inflation and higher rates, however immigration is providing a structural tailwind for the economy.
So, while the overall picture is still solid, there are pockets of weakness, though CBA is confident it can navigate any difficulties. which could mean good news for CBA shares.
Arrears do seem to be building at the bank – the ratio of home loans that were at least 90 days overdue was 0.43% at December 2022, 0.47% at June 2023, 0.52% at December 2023, and 0.61% at March 2024.
In the third quarter update, CBA said it expects to see "further increases in arrears in the months ahead given continued pressure on real household disposable incomes".
In terms of the NIM, CBA reported an 11 basis point decline to 1.99% in the HY24 result because of continued competitive pressures and higher funding costs.
Analyst views on CBA shares
The broker UBS recently noted CBA may see a softer fourth quarter on the revenue front, with CBA showing "good cost disciplined and management", though there has been a "visible deterioration" in asset quality metrics.
UBS notes CBA is leaning on its own distribution channels to defend and drive volume growth in mortgages, a strategy that has seen CBA grow at 0.7 times the rate of Australia's loan system.
The broker believes defending its 'back book' profitability remains a "key imperative" for management.
UBS has made a number of forecasts for CBA shares in FY25.
The broker has forecast CBA can generate $27.2 billion of revenue, $13.6 billion of pre-tax profit and $9.8 billion of net profit after tax (NPAT).
In terms of the dividend, UBS thinks CBA shares will have a fully franked dividend yield of 3.5%.
UBS has a price target on CBA shares of $105, implying the bank could drop by well over 10% in the next 12 months.
