The Commonwealth Bank of Australia (ASX: CBA) share price is currently trading above $140. Is it a buy at this level?
Huge rally for the ASX bank
It has been an incredible time to own major ASX bank shares like CBA, with the share price soaring 26% this year and 40% over the past 12 months.
The ASX 200 (ASX: XJO) has only risen 5% this year and it has gone up 11% in the past 12 months.
When we look at the latest financial update from the bank, being the FY24 result, it didn’t seem like the sort of performance to inspire that sort of capital growth.
FY24 cash net profit declined 2% to $9.84 billion and statutory net profit fell 6% to $9.48 billion. The bank reported loan volume growth in its core businesses was offset by lower lending and deposit margins.
CBA’s net interest margin (NIM), a key profit measure for showing how much it’s making on its lending (including the cost of the funding), declined 8 basis points (0.08%) to 1.99%. The bank said this weakness was largely due to the impact of competition and deposit switching.
On the positive side, the bank reported a loan impairment expense of $802 million in FY24, which was 28% lower than FY23. CBA said this decrease reflected its “robust credit origination and underwriting practices, rising house prices, and lower expected losses within consumer finance.
Should investors buy the CBA share price at this valuation?
One of the most important factors when considering an investment is thinking about whether it’s too expensive. I do believe it’s worth owning quality businesses even if they are priced more expensively than their weaker competitors.
However, at some point even a great business can become overvalued.
The CBA share price is now valued at 24x FY24’s profit. To me, that looks expensive both compared to its historical earnings valuation as well as for how slow the (huge) business is growing and could grow in the foreseeable future.
The fully franked dividend yield has been pushed down to just 3.2%, so the cash distributions are not appealing to me. Some of its peers, such as National Australia Bank Ltd (ASX: NAB), offer a much larger yield. NAB’s annual dividend continues to grow too.
Considering CBA’s loan arrears are rising – home loan arrears over 90 days went from 0.47% in FY23 to 0.65% in FY24 – I think the outlook is not promising for how expensively the business is trading.
There are other ASX dividend shares that could be better buys for income and growth in my opinion.
