3 things about CBA stock every smart investor knows

This is what investors need to be aware of.

| More on:
Group of successful real estate agents standing in building and looking at tablet.

Image source: Getty Images

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

After Commonwealth Bank of Australia (ASX: CBA) reported its FY25 half-year result, CBA stock has managed to hold onto its gains of the past year. In the last 12 months, Commonwealth Bank shares have risen by more than 40%.

Created with Highcharts 11.4.3Commonwealth Bank Of Australia PriceZoom1M3M6MYTD1Y5Y10YALL16 Feb 202416 Feb 2025Zoom ▾Mar '24May '24Jul '24Sep '24Nov '24Jan '25Apr '24Apr '24Jul '24Jul '24Oct '24Oct '24Jan '25Jan '25www.fool.com.au

It's curious that CBA has managed to rise so much when its profit did not go up anywhere near as much in the six months to 31 December 2024 – cash net profit increased by 2% year over year to $5.13 billion, and statutory net profit went up 6% to $5.14 billion.

But, aside from a potential impending interest rate cut, there are a few factors to be positive about with the ASX bank share that investors need to know about.

Strong performance of profit margins

A bank's net interest margin (NIM) is a key metric that tells investors how much profit the bank is making in percentage terms.

It includes the interest rate of its loans minus the cost of funding (such as term deposits) – the net figure is the NIM. Generally, the higher the NIM, the better. But if it is too high, competitors may be able to take market share.

In the past few years, banks have talked about heightened competition which has collectively harmed the banking sector's NIM.

But, impressively, CBA reported that its NIM rose 2 basis points (0.02%) year over year to 2.08%. In such a competitive industry, I think the higher margin shows the quality of the bank.

Loan book performing better than expected

There has been a significant concern about the ability of borrowers to afford their loans in the current environment due to the high cost of debt.

Banks strengthened their provisions in case things turned out badly. But, CBA's loan book is performing strongly and it was able to report a sizeable decrease in its loan impairment expense, which is great news for owners of CBA stock.

In the first half of FY25, CBA's loan impairment expense decreased 23% to $320 million. The bank said there was a reduction because of "disciplined credit origination and underwriting practices, rising house prices, and lower expected losses within consumer finance."

The bank said consumer arrears remained "broadly stable", supported by tax refunds and changes to income tax rates and thresholds. The majority of its home lending customers "remain in advance of scheduled repayments".

According to CBA, the provision coverage remains "strong" at 1.62% of credit risk-weighted assets (essentially its loan balance), and it has an approximate $2.4 billion buffer relative to the losses expected under the bank's central economic forecast scenario.  

Stronger returns for shareholders

It was pleasing to see that owners of CBA shares will receive a larger dividend payment. The declared interim dividend is $2.25 per share, representing a 5% increase year over year.

But for me, the more important statistic was the half-on-half rise of the return on equity (ROE). This statistic tells us how much profit a business is making on the shareholder money retained within the business.

CBA reported that its HY25 ROE improved by 40 basis points to 13.7% compared to the second half of FY24. This suggests that Commonwealth Bank can make a decent return on future profit retained within the business.

While I'm not looking to buy CBA stock at the current valuation, I'll acknowledge it's doing a good job.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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 Scott Phillips.

More on Bank Shares

Bank building with the word bank in gold.
Bank Shares

What price targets does Macquarie have on the big 4 banks?

Here's what the broker has to say about the big 4 bank share prices.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Should I buy ANZ shares today?

With a 5.7% dividend yield, are ANZ shares a good buy right now?

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Bank Shares

Can Bank of Queensland shares keep outperforming the other ASX 200 bank stocks into 2026?

A leading expert offers his verdict on what’s ahead for Bank of Queensland shares.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

Forget CBA shares, Ord Minnett says this ASX bank stock could rocket 50%+

Let's see which bank stock could be a better buy.

Read more »

ASX 200 shares broker downgrade origami paper fortune teller with buy hold sell and dollar sign options
Broker Notes

Are Bendigo Bank shares a buy, hold or sell? Here's Macquarie's latest recommendation

Should I buy the dip on Bendigo Bank shares today?

Read more »

A man thinks very carefully about his money and investments.
Bank Shares

Why these experts say sell CBA shares now

These two investment experts recommend selling CBA shares today. But why?

Read more »

A human-like robot checks out market performance on a laptop, indicating the rise of AI shares.
Bank Shares

Westpac share price drops despite key AI appointment

The banking giant is doubling down on its AI ambitions.

Read more »

A woman looks questioning as she puts a coin into a piggy bank.
Bank Shares

Should you buy NAB shares in June?

Is this the right time to invest in the ASX bank share?

Read more »