The Commonwealth Bank of Australia (ASX: CBA) share price is an interesting conundrum for investors. Should investors be bullish or bearish?
The CBA share price has gone up by 30.7% over the last six months and it has gone up by 45% during the last year.
It has been a good period of time for the ASX banking sector as confidence returns.
Can this continue?
The bull case for the CBA share price
CBA, and all the big banks, are seeing a reduction in the number of loans that are in deferral.
The major bank hasn’t seen a large increase in the amount of loans that are overdue by more than 90 days.
CBA and the other banks are no longer increasing their credit provisions by significant amounts. This is good for profit growth.
The banks are also seeing high levels of demand for loans, leading to growth for CBA. Credit growth is one of the major factors for a bank.
CBA’s net interest margin (NIM) may be stabilising now. The NIM is important because it outlines how much profit that CBA is making on the loans it’s giving out.
Whilst I don’t have an opinion on the Australian economy, there are some commentators that believe the next few years will be good economically, which could also be good for business lending as well. CBA wants to be a bigger player in business lending.
Bear case for the CBA share price
The CBA share price may have run a bit too hard, for now.
There has been a lot of government support for the Australian economy with JobKeeper, JobSeeker and so on. This is all going to turn off soon. That could have a negative impact on the whole economy to some degree.
There’s also a chance that a material portion of the loans still being deferred will go bad. Hopefully, CBA’s prior provisions will be enough to cover that.
I’m not sure how much of a capital return CBA can generate from here in the shorter-term, apart from the resurgent dividends it’s going to pay over the next 12 months.
Summary thoughts
At the current CBA share price, it’s valued at 20 times the estimated earnings for the 2021 financial year using CommSec’s projections. It also had a projected fully franked dividend yield of 5.2%.
I believe there may be other ASX shares that could generate better profit growth over the next decade than CBA.
