After Commonwealth Bank of Australia (ASX: CBA) reported its FY25 half-year result, CBA stock has managed to hold onto its gains of the past year. In the last 12 months, Commonwealth Bank shares have risen by more than 40%.
It's curious that CBA has managed to rise so much when its profit did not go up anywhere near as much in the six months to 31 December 2024 – cash net profit increased by 2% year over year to $5.13 billion, and statutory net profit went up 6% to $5.14 billion.
But, aside from a potential impending interest rate cut, there are a few factors to be positive about with the ASX bank share that investors need to know about.
Strong performance of profit margins
A bank's net interest margin (NIM) is a key metric that tells investors how much profit the bank is making in percentage terms.
It includes the interest rate of its loans minus the cost of funding (such as term deposits) – the net figure is the NIM. Generally, the higher the NIM, the better. But if it is too high, competitors may be able to take market share.
In the past few years, banks have talked about heightened competition which has collectively harmed the banking sector's NIM.
But, impressively, CBA reported that its NIM rose 2 basis points (0.02%) year over year to 2.08%. In such a competitive industry, I think the higher margin shows the quality of the bank.
Loan book performing better than expected
There has been a significant concern about the ability of borrowers to afford their loans in the current environment due to the high cost of debt.
Banks strengthened their provisions in case things turned out badly. But, CBA's loan book is performing strongly and it was able to report a sizeable decrease in its loan impairment expense, which is great news for owners of CBA stock.
In the first half of FY25, CBA's loan impairment expense decreased 23% to $320 million. The bank said there was a reduction because of "disciplined credit origination and underwriting practices, rising house prices, and lower expected losses within consumer finance."
The bank said consumer arrears remained "broadly stable", supported by tax refunds and changes to income tax rates and thresholds. The majority of its home lending customers "remain in advance of scheduled repayments".
According to CBA, the provision coverage remains "strong" at 1.62% of credit risk-weighted assets (essentially its loan balance), and it has an approximate $2.4 billion buffer relative to the losses expected under the bank's central economic forecast scenario.
Stronger returns for shareholders
It was pleasing to see that owners of CBA shares will receive a larger dividend payment. The declared interim dividend is $2.25 per share, representing a 5% increase year over year.
But for me, the more important statistic was the half-on-half rise of the return on equity (ROE). This statistic tells us how much profit a business is making on the shareholder money retained within the business.
CBA reported that its HY25 ROE improved by 40 basis points to 13.7% compared to the second half of FY24. This suggests that Commonwealth Bank can make a decent return on future profit retained within the business.
While I'm not looking to buy CBA stock at the current valuation, I'll acknowledge it's doing a good job.
