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The Commonwealth Bank of Australia (ASX:CBA) share price has been trading above $140, marking a significant rally for the ASX 200 bank stock. Investors have seen impressive gains from the bank’s shares, with a 26% rise this year and a 40% increase over the past 12 months. For comparison, the broader S&P/ASX 200 Index (ASX:XJO) has only gained 5% this year and 11% over the past year.
Strong Performance for ASX Bank Shares
Major ASX bank shares like Commonwealth Bank of Australia have been performing well in 2024. However, when reviewing CBA's FY24 financial results, the bank’s earnings growth may not fully explain the significant rally in its share price.
In FY24, CBA’s cash net profit declined by 2% to $9.84 billion, while statutory net profit fell by 6% to $9.48 billion. The bank noted that while loan volume growth was solid, it was offset by lower lending and deposit margins, which impacted its overall performance.
One key metric for banks, the net interest margin (NIM), also declined by 8 basis points, falling to 1.99%. The decline in NIM was attributed to competition and deposit switching. Despite the drop in profits and NIM, the bank’s loan impairment expenses decreased by 28%, reflecting strong credit practices and rising house prices, which was a positive sign for its balance sheet.
Is the CBA Share Price Overvalued?
At its current valuation, Commonwealth Bank of Australia is trading at around 24x FY24’s profit. While CBA is considered one of the highest-quality businesses in the ASX financial sector, such a valuation appears relatively high, especially considering the slower growth prospects for a company of this size.
Additionally, the fully franked dividend yield for CBA shares has dropped to 3.2%, which may be less appealing compared to other ASX bank stocks that offer higher yields. The bank's loan arrears also rose in FY24, with home loan arrears over 90 days increasing from 0.47% in FY23 to 0.65%. This increase in arrears could signal potential headwinds for the bank’s financial outlook in the near term.
Final Thoughts
While Commonwealth Bank of Australia continues to be a key player in the ASX banking sector, investors may want to consider whether the current share price accurately reflects the bank's future growth potential. With a high valuation and modest dividend yield, it’s important to evaluate the company's long-term prospects, especially in light of rising loan arrears and competitive pressures within the banking industry.
