Could the Commonwealth Bank of Australia (ASX: CBA) share price be a good one to consider right now?
At the moment, CBA shares are currently at more than $100. That puts the CBA market capitalisation at around $179 billion according to the ASX.
Whilst it's one of the largest businesses on the ASX, it is also one that generates one of the biggest profits. In FY21 it made $8.8 billion of statutory profit. The CBA profit is more than the market caps of most businesses on the ASX.
The big bank has been seeing a recovery from the impacts of COVID-19, which were particularly felt during FY20.
FY21's profit increased by almost 20% to $8.84 billion because of improved economic conditions and outlook resulting in a lower loan impairment expense and a "strong" operational performance.
The loan impairment expense declined by 78% to $554 million. CBA said that it has maintained a "strong" provision coverage ratio of 1.63%, reflecting the economic uncertainty from the continuing impacts of COVID-19.
Whilst the net interest margin (NIM) declined 4 basis points to 2.03% because of higher liquid assets and the ongoing impact of a lower interest rate environment, the balance sheet continued to improve. The common equity tier 1 (CET1) capital ratio, showing a measure of strength of the balance sheet, rose by 150 basis points to 13.1%. The bank pointed out that this is above APRA's 'unquestionably strong' benchmark of 10.5%.
Profitability and the balance sheet can have an impact on the CBA share price.
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Large shareholder returns
When CBA unveiled its FY21 result, it decided that it would reward shareholders very handsomely after a difficult FY20.
The board decided to increase the full year dividend by 17% to $3.50 per share. CBA's leadership decided on that level of a dividend because it was supported by the bank's strong capital position.
But on top of that, CBA also announced a $6 billion off-market share buy-back.
Regarding the buy-back, the big four bank said that:
The group's strong capital position and our progress on executing our strategy mean we are well placed to support our customers and manage outgoing uncertainties, while also returning a portion of excess capital to shareholders.
CBA referenced that strategic divestments have generated $6.2 billion in excess capital since 2018. The bank explained that it was the most efficient and appropriate way to commence the return of surplus capital, as shareholders will benefit from a lower share count that will support return on equity and dividends per share.
Is the CBA share price an opportunity?
There are lot of sell, or equivalent, ratings on CBA at the moment.
One of the latest ratings is from Morgan Stanley, which rates CBA as a sell with a price target of $90. That implies the broker thinks that CBA shares are going to fall by more than 10% over the next 12 months.
The broker notes that the tougher lending standards set by APRA could mean less Australian loans compared to if there had been no changes. That could be impactful on CBA in-particular because of how much of its profit comes from the Australian residential market.
Using Morgan Stanley's FY22 numbers, the CBA share price is valued at 21x FY22's estimated earnings with a forward grossed-up dividend yield of 5.4%.
