4 reasons why the CBA (ASX:CBA) share price could be a buy

There are four reasons why the CBA (ASX:CBA) share price could be a buy according to fund manager Rhett Kessler from Pengana.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There are a few reasons why the Commonwealth Bank of Australia (ASX: CBA) share price could be a buy.

Recent financial results

CBA said that its FY20 result reflected the impact of COVID-19 on customers and the economy, however the bank said its performance remained strong due to disciplined execution of the strategy and it continued to improve its balance sheet.

FY20 statutory net profit after tax (NPAT) dropped 12.4% to $9.63 billion and cash NPAT declined 11.3% to $7.3 billion. The loan impairment expense increased by $1.3 billion to $2.5 billion as the loan loss rate increased to 33 basis points. The net interest margin (NIM) declined by another 2 basis points to 2.07% because of the impact of lower interest rates.

The common equity tier 1 (CET1) capital ratio was 11.6%, which was above APRA's unquestionably strong benchmark of 10.5%.

In terms of the amount of COVID-19 related loan deferrals, at 31 July 2020 there were 135,000 home loans being deferred representing 8% of total accounts (down from 154,000 at the peak) and there were 59,000 business loans still being deferred which represented 15% of total balances, down from 86,000 at the peak. At the end of October, the number of home loan deferrals had reduced to 45,600.

The latest financial result was the FY21 first quarter trading update which showed that CBA generated $1.9 billion of statutory NPAT and $1.8 billion of cash profit, down 16% on the prior corresponding period. CBA said that income was stable, but expenses (excluding customer remediation) were up 2%.

In that latest quarter, the CET1 ratio continued to strengthen as it grew 20 basis points to 11.8%.

What are the reasons that the CBA share price could be a buy?

Rhett Kessler from the Pengana Australian Equities Fund, of Pengana Capital Group Ltd (ASX: PCG), thinks that the banks have a positive outlook.

The first reason is that there's accelerating home loan growth supported by low interest rates and first homeowner support. Indeed, at the moment the official Australian interest rate set by the Reserve Bank of Australia is just 0.25% right now.

The second reason, or group of reasons, is that there's a supportive federal budget, improving housing finance approvals and house prices are holding up better than expected.

The third reason was that there has been a meaningful reduction in loan deferrals.

The final reason is that there is lower than anticipated loss provisioning.

Those factors were key for causing Pengana to increase the exposure to the major banks.

Valuation

According to the ASX, CBA currently has a market capitalisation of $150 billion with the CBA share price just over $85.

Looking at the (externally provided) Commsc earnings estimates for CBA shares, it's valued at 21x FY21's estimated earnings. Looking further ahead, it's valued at 18x FY23's estimated earnings.

There are also estimates for the dividends that CBA may pay shareholders. In FY21 it could pay an annual dividend of $2.75 per share, equating to a grossed-up dividend yield of 4.6% at the current share price. In FY23 it's projected to pay a dividend of $3.23 per share, equating to a grossed-up dividend yield of 5.4%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Bank Shares

Young investor sits at desk looking happy after discovering Westpac's dividend reinvestment plan
Bank Shares

Invested $10,000 in Westpac shares 2 years ago? Guess how much you've already banked!

Atop their regular dividend payments, Westpac shares have enjoyed a strong two-year run.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Bank Shares

Buying CBA stock today? Here's the dividend yield you'll get

CBA's yield right now might surprise you.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
Bank Shares

How much would the ASX 200 fall if CBA shares returned to 'fair value'?

CBA shares account for 12% of the ASX 200.

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Dividend Investing

How are these passive income investors earning a 7.5% dividend yield on their surging CBA shares?

CBA shares are proving more lucrative for some passive income investors than others.

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank.
Bank Shares

$10,000 invested in CBA shares in FY25 is now

Let's see whether it was a successful 12 months for bank investors in the last financial year.

Read more »

Woman with spyglass looking toward ocean at sunset.
Bank Shares

What could happen to the big 4 banks in FY26?

What’s in store for the big four banks over the next 12 months?

Read more »

Bank building in a financial district.
Bank Shares

Which is the only ASX 200 bank stock Macquarie expects to outperform in FY 2026?

Macquarie forecasts a tough year ahead for the ASX 200 banks, with only one expected to outperform.

Read more »

a couple and their baby sit together at their computer carrying out digital transactions and smiling happily.
Bank Shares

Is the NAB share price a buy for passive income?

Should investors buy into this major bank for income?

Read more »