Owners of Commonwealth Bank of Australia (ASX: CBA) shares may want to know whether the bank is likely to grow profit in the coming years.
Profit is a key financial metric for investors as it pays for dividend payments. Investors also use profit to value the business — if profit is growing over time, then the CBA share price can increase as well.
Suppose the bank was trading at a price/earnings (P/E) ratio of 20 — if the company's profit grows 10% in a year, then the CBA share price could increase 10% as well.
With that in mind, let's examine where CBA's earnings are expected to go in the next few years.
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First, FY24
The broker UBS thinks CBA's net profit after tax (NPAT) will fall slightly to $9.98 billion.
UBS recently attended a meeting with CBA's investor relations ahead of the blackout period before the bank releases its FY24 earnings result on Wednesday, 14 August.
That meeting revealed that, although easing, "competition continues to weigh on [the] NIM and is unlikely to change anytime soon."
In addition, the market has elevated expectations for bad and doubtful debts "above what banks are seeing internally".
And lending growth, particularly in the small and medium enterprise (SME) segment, "continues to hold up better than expected".
CBA remains "focused on writing loans above its cost of capital despite ongoing intense competition, particularly in mortgages." The bank intends to defend market share with management focused on customer retention, proprietary channel distribution and more complex loans. It doesn't want to lose more market share to brokers.
Almost flat in FY25
The CBA share price is up 17% in 2024 to date, compared to a 4% rise for the S&P/ASX 200 Index (ASX: XJO).
UBS has suggested that CBA's NPAT could slightly increase by 0.5% to $10.04 billion.
The market consensus suggests that the CBA net interest margin could decline around 8 basis points between the first half of FY24 and FY26, finishing at 1.92% (according to UBS). This is a reduction that the CBA team "did not suggest was unrealistic in the current competitive environment."
A little bit of growth in FY26
UBS expects CBA to see a bit more net profit growth in the 2026 financial year.
The broker has projected that the ASX bank share's profit will rise by approximately 1.75% to $10.2 billion, which would represent an increase of around $200 million in dollar terms.
In earnings per share (EPS) terms, CBA is projected to make $5.93 of profit, and this puts its valuation at approximately 22x FY26's estimated earnings.
Further improvement in FY27
In the final set of these projections from UBS, CBA is expected to see its net profit after tax rise another 1.2% to $10.34 billion. In EPS terms, this could translate into $6 of profit.
At the current CBA share price, this would mean it's valued at around 22x FY27's estimated earnings.
Foolish takeaway
Very limited growth is expected over the next few years, so the valuation seems expensive to me. I wouldn't want to buy CBA shares at the moment. UBS currently has a sell rating on CBA shares with a price target of just $107.
