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4 reasons why the CBA (ASX:CBA) share price could be a buy

There are four reasons why the CBA (ASX:CBA) share price could be a buy according to fund manager Rhett Kessler from Pengana.
The post 4 reasons why the CBA (ASX:CBA) share price could be a buy appeared first on The Motley Fool Australia. –

CBA

There are a few reasons why the Commonwealth Bank of Australia (ASX: CBA) share price could be a buy.

Recent financial results

CBA said that its FY20 result reflected the impact of COVID-19 on customers and the economy, however the bank said its performance remained strong due to disciplined execution of the strategy and it continued to improve its balance sheet.

FY20 statutory net profit after tax (NPAT) dropped 12.4% to $9.63 billion and cash NPAT declined 11.3% to $7.3 billion. The loan impairment expense increased by $1.3 billion to $2.5 billion as the loan loss rate increased to 33 basis points. The net interest margin (NIM) declined by another 2 basis points to 2.07% because of the impact of lower interest rates.

The common equity tier 1 (CET1) capital ratio was 11.6%, which was above APRA’s unquestionably strong benchmark of 10.5%.

In terms of the amount of COVID-19 related loan deferrals, at 31 July 2020 there were 135,000 home loans being deferred representing 8% of total accounts (down from 154,000 at the peak) and there were 59,000 business loans still being deferred which represented 15% of total balances, down from 86,000 at the peak. At the end of October, the number of home loan deferrals had reduced to 45,600.

The latest financial result was the FY21 first quarter trading update which showed that CBA generated $1.9 billion of statutory NPAT and $1.8 billion of cash profit, down 16% on the prior corresponding period. CBA said that income was stable, but expenses (excluding customer remediation) were up 2%.

In that latest quarter, the CET1 ratio continued to strengthen as it grew 20 basis points to 11.8%.

What are the reasons that the CBA share price could be a buy?

Rhett Kessler from the Pengana Australian Equities Fund, of Pengana Capital Group Ltd (ASX: PCG), thinks that the banks have a positive outlook.

The first reason is that there’s accelerating home loan growth supported by low interest rates and first homeowner support. Indeed, at the moment the official Australian interest rate set by the Reserve Bank of Australia is just 0.25% right now.

The second reason, or group of reasons, is that there’s a supportive federal budget, improving housing finance approvals and house prices are holding up better than expected.

The third reason was that there has been a meaningful reduction in loan deferrals.

The final reason is that there is lower than anticipated loss provisioning.

Those factors were key for causing Pengana to increase the exposure to the major banks.

Valuation

According to the ASX, CBA currently has a market capitalisation of $150 billion with the CBA share price just over $85.

Looking at the (externally provided) earnings estimates for CBA shares, it’s valued at 21x FY21’s estimated earnings. Looking further ahead, it’s valued at 18x FY23’s estimated earnings.

There are also estimates for the dividends that CBA may pay shareholders. In FY21 it could pay an annual dividend of $2.75 per share, equating to a grossed-up dividend yield of 4.6% at the current share price. In FY23 it’s projected to pay a dividend of $3.23 per share, equating to a grossed-up dividend yield of 5.4%.

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Motley Fool contributor Tristan Harrison 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 Bruce Jackson.

The post 4 reasons why the CBA (ASX:CBA) share price could be a buy appeared first on The Motley Fool Australia.

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