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Highlights
- CBA shares have surged nearly 40% in 2024, surprising many investors.
- First-quarter FY25 update shows stable earnings despite challenges in the operating environment.
- Experts have mixed views on the outlook, with some warning that the stock may be overvalued.
The Commonwealth Bank of Australia (ASX:CBA) has emerged as one of the surprise performers in 2024, with its share price rising by close to 40% this year. However, with 2025 on the horizon, investors are wondering whether the bank can sustain its growth or if challenges ahead could limit its potential. Let’s take a closer look at CBA’s latest performance and what analysts are forecasting for the year ahead.
CBA’s 2024 Performance
CBA’s first-quarter FY25 update revealed a cash net profit after tax (NPAT) of approximately $2.5 billion, which remained flat year-over-year. However, the result did show a 5% increase compared to the quarterly average of the FY24 second half, or a 3% rise on a per-day basis. This modest growth suggests that while CBA's earnings remain stable, the growth rate may be slowing.
Key drivers for the increase in operating income were profitable volume growth and a 3.5% rise in operating income. However, operating expenses also saw an increase of 3% due to factors like wage inflation and increased investment spending. This paints a picture of a bank operating in a relatively challenging environment with rising costs, which may affect its ability to grow earnings significantly in the coming year.
CBA's Challenges in 2025
Looking ahead, analysts are cautious about the earnings growth outlook for CBA in 2025. Darren Thompson, head of asset management at Equity Trustees Asset Management, believes that profit growth for banks could be limited next year due to several factors, including modest credit growth, competition restricting net interest margins, and ongoing cost pressures. He also highlights that bad debt provisions remain cyclically low, which has contributed to sustained profitability despite the broader economic challenges.
However, one of the reasons CBA has been able to maintain relatively strong profitability is the resilience of the Australian housing market. According to CreditorWatch, the household sector in Australia has been able to delever significantly in recent years due to the sharp rise in house and share prices. For many households still facing financial pressures, the 20-40% rise in house prices since before COVID means that they can often sell assets at a profit, which in turn has helped limit the risk of loan defaults and kept bank losses low.
While the current situation is far from ideal for many individuals—evidenced by the increasing demand for food support services—the data suggests that these challenges have not yet translated into significant losses for banks, including CBA. In fact, non-bank lenders have been more vulnerable to these pressures.
CBA Share Price Target and Valuation Concerns
Despite the positive fundamentals, CBA shares are viewed by many analysts as expensive. For instance, UBS has a sell rating on the stock, with a price target of AU$110. This suggests that the bank’s shares could fall by 30% over the next year, which would represent a significant correction in its valuation.
At the time of writing, CBA’s share price was trading at around AU$150, implying a price-to-book value of 3.2x for FY26, which is considered relatively high. Additionally, CBA’s price-to-earnings (P/E) ratio is above 25x for FY26 earnings, signaling that the stock may be overvalued compared to its earnings potential.
