The Commonwealth Bank of Australia (ASX: CBA) share price has been a very pleasing investment, rising by roughly 150% over the last five years (at the time of writing).
Some investors have questioned whether the bank's valuation is worth it, considering it operates in the same industry as other banks, like Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), and ANZ Group Holdings Ltd (ASX: ANZ), which have lower valuations.
CBA has some aspects going for it, including a relatively strong net interest margin (NIM), a pleasing return on equity (ROE), impressive proprietary channels to attract new loans, and a resilient dividend.
But the bank has a new focus recently: efficiencies through productivity gains and cost reductions. Broker UBS has analysed whether this could be enough to drive profitability higher and justify a higher CBA share price.
Can Commonwealth Bank improve its cost base?
UBS thinks it's possible, with the obvious cost reduction assumed to come from AI usage, with its current investment spending of $2.3 billion, the announced partnership with OpenAI, and senior management's focus on these capabilities across divisions.
The broker suggested that for the bank to achieve similar cost-to-income ratios as Nordic and Singaporean banks (of below 40%), it may (need to) come from staff attrition rates and reverting back to longer-term hiring averages. UBS thinks CBA needs to achieve this ratio to justify its premium valuation.
The broker commented:
Using UBS proprietary data sets, we're able to peer through comparisons between international banks and see what best in class looks like across the globe. We find that Aussie banks are efficient, but there is room to improve, even for CBA, Australia's most cost efficient and profitable bank. Despite potential material and outsized benefits coming from AI, we don't think it's the panacea it's made out to be yet.
Even so, UBS' analysis shows potential cost improvements in the near-term in the range of between 2.5% to 3.5%, with the cost to income ratio improving to 42% by FY30, down from 45% as at FY25.
Is the CBA share price a buy?
UBS still wants to see "greater intent" on costs before including this in the forecasts. Even if UBS did include a change in the forecasts, it said:
…this would still likely leave our fair value well below the current share price
Based on that reasoning, the broker still has a sell rating on CBA shares as it considers the bank overvalued.
UBS currently has a net profit forecast of $12.4 billion for CBA in FY30. There are other ASX shares that seem more appealing.
