The Commonwealth Bank of Australia (ASX: CBA) share price has shown strong performance recently, with a rise of over 30% since the beginning of November 2023, as shown on the chart below. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) has risen 14% in the same time period.
CBA has climbed alongside the other major ASX bank shares, including National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and ANZ Group Holdings Ltd (ASX: ANZ).
Does the rise make sense? As John Maynard Keynes once said:
The market can stay irrational longer than you can stay solvent
Does the recent performance justify investor enthusiasm?
It's a strange surge for the banking sector, considering the ongoing banking challenges remain. The net interest margin (NIM) (lending profit after funding costs) is drifting lower, arrears are climbing, competition is strong and credit demand is not strong.
In the FY24 third quarter update, cash net profit after tax (NPAT) declined 5% year over year to around $2.4 billion.
CBA noted its net interest income was challenged because of "lower net interest margins primarily from continued competitive pressures and customers switching to higher yielding deposits."
It said there was "improved momentum" in volume growth across home lending and household deposits. Home loans grew by $4.2 billion, at 0.7 times the system, for the three months to March 2024.
CBA also revealed its loan arrears are increasing – the percentage of home loans that are at least 90 days overdue increased to 0.61% at March 2024, up from 0.52% at December 2023, 0.44% at March 2023 and 0.43% at December 2022.
Despite that backdrop, the CBA share price has delivered this rise. It's now very expensive on typical valuation metrics.
According to the independently provided forecasts on Commsec, the CBA share price is valued at 22x FY24's estimated earnings and 22.5x FY25's estimated earnings – earnings per share (EPS) is expected to drop around 2.5% in FY25 amid the challenges I've talked about.
My take on the CBA share price
In my opinion, CBA is definitely one of the highest-quality banks in Australia, along with Macquarie Group Ltd (ASX: MQG) and probably NAB.
It has done well growing profit over the last decade despite the challenges, and I applaud its efforts to expand in business banking, where it can diversify and grow its earnings.
I don't think CBA shares offer good value here, but I would have said that when the CBA share price was at $120 (and it's above $127 now).
There is one main reason the CBA share price keeps rising – there is stronger buying demand than selling. It's hard to say who is driving the buy, but I wouldn't be surprised if it's investors who are not entirely focused on valuation.
ASX-focused exchange-traded funds (ETFs), such as Vanguard Australian Shares Index ETF (ASX: VAS), must buy the shares in their index if people give the fund provider money.
Also, Australians collectively continue to contribute billions of dollars to their superannuation fund, such as AustralianSuper, which must allocate that money in accordance with the super member's investment allocation wishes, which typically would include a sizeable portion to Australian shares.
There is a lot of capital in Australia that is looking for a home every month or three months. So, it's possible the CBA share price could keep rising, even if the valuation isn't appealing.
