Owning Commonwealth Bank of Australia (ASX: CBA) shares has been a very fruitful investment over the last few years, as the chart below shows.
'Past performance is not a guarantee of future performance' is a common phrase used in the investment world, but it's an important one, particularly in this scenario.
But, it's also true that a relatively small group of businesses are responsible for a large portion of outperformance. As the biggest businesses on the ASX, CBA shares play an important role in the overall market performance.
However, it's important to question whether CBA can be a market-beating investment from here, or whether it'd be better to buy something else (including the Vanguard Australian Shares Index ETF (ASX: VAS)) for better returns.
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Expensive valuation
CBA shares are often called expensive. The bank does seem expensive if you look at different valuation metrics like the price-earnings (P/E) ratio or the price-to-book ratio. The market capitalisation is trading at a high multiple compared to its earnings and its balance sheet.
The ASX bank share is currently trading at around 25x FY26's estimated earnings, according to the independent forecast on Commsec. On a forward earnings multiple, that's high compared to its history and much higher than names like National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), and ANZ Group Holdings Ltd (ASX: ANZ).
I'd describe CBA as higher quality than the other big three banks. It has a strong return on equity (ROE), a pleasing net interest margin (NIM), and relatively low bad debts. It also generates a relatively high level of loans through its own channels rather than relying on mortgage brokers.
The rise of mortgage brokers has made it easy to compare loans, with price (the interest rate) being a key differentiator. Having its own channels somewhat protects CBA from competition and the worst of the margin pressures.
I do believe CBA is worthy of trading at a higher valuation than its peers. Currently, both Westpac and NAB shares are trading at 17x FY26's estimated earnings, significantly less than CBA, even though they're all in the same industry facing the same risks.
Is this a good time to invest in CBA shares?
The business is not generating much growth to suggest it should trade at an even higher earnings multiple.
In FY25, CBA's cash net profit after tax (NPAT) rose 4% to $10.25 billion, and the pre-provision profit only increased by 3%. The second-half profit was flat compared to the first half. CBA's expenditure was impacted by higher operating expenses from inflation and accelerated investment in areas like technology and generative AI.
The business is also balancing maintaining market share with profitability when it decides on the loan and savings interest rate it provides for customers. This has an impact on the net interest margin.
Unless institutional investors like superannuation funds and exchange-traded funds (ETFs) become even stronger buyers of CBA shares, I can't foresee the CBA P/E ratio going much higher. Therefore, the turn may be driven by CBA's net profit performance.
Credit demand may somewhat increase following recent RBA rate cuts, but I'm not expecting it to be so strong as to materially accelerate CBA's pre-provision profit growth.
I don't think the CBA share price is a buy because of the weak earnings growth compared to the valuation. There are a fair few ASX shares I'd back to deliver stronger returns.
