After the strong rise of the Commonwealth Bank of Australia (ASX: CBA) share price in the past year (up more than 40%), investors may be wondering what's going to happen next. As profit generation is so important, we're going to look at some projections to see if they could indicate what direction the ASX bank share could go.
The major bank recently revealed a relatively strong result for the six months to 31 December 2024.
Let's quickly remind ourselves what the major bank told investors in its report, and then we'll look at some projections by UBS for CBA shares.
Earnings recap
The company reported that its cash net profit grew by 2% year over year to $5.1 billion, and statutory net profit improved by 6% year over year to $5.1 billion. The pre-provision profit grew by 1% to $7.7 billion.
CBA's core net interest margin (NIM) rose 2 basis points (0.02%) to 2.08%, with competitive pressures offset by higher earnings on capital hedges and the replicating portfolio.
Thankfully, CBA's loan impairment expense declined 23% year over year to $320 million.
Operating expenses increased by 6% year over year to $6.37 billion. This was mainly due to higher staff expenses due to inflation and two additional working days, as well as additional investment to "accelerate the refresh" of its technology infrastructure and to "further enhance" its generative AI capabilities and data infrastructure. Higher expenditures are offset by ongoing productivity initiatives.
The ASX bank share's board of directors decided to increase the interim dividend per CBA share by 5% to $2.25.
Where could CBA shares go?
The ASX bank share noted that the company benefited from a better-than-expected NIM outcome and lower-than-expected credit losses. According to UBS, volume growth "was strong" too, mainly driven by the institutional division, business banking, and good progress in mortgages.
UBS noted that CBA shares are trading on a 3.6x price-to-book value and a 2-year forward price-earnings (P/E) ratio of around 27.
According to UBS, CBA is projected to make a net profit of $10.27 billion in FY25 and $10.73 billion in FY26.
The broker said:
…we believe better value and more upside can be found elsewhere in our coverage universe. Yes, consensus EPS estimates will be revised up on CBA, with EPS expected to grow at a 3 year CAGR of ~2.5-3.0%. Under this scenario, CBA is unlikely to grow into its multiple in the near with the underlying share price performance, in our view, more dependant of underlying earnings, NTA growth and capital returns.
UBS currently rates CBA shares as a sell, with a price target of $115. That implies the ASX bank share could fall by 30% in the next 12 months. That's a very negative outlook, though that's not a guarantee CBA shares can't keep rising – time will tell.
