The Commonwealth Bank of Australia, or CBA for short, is Australia’s largest bank, with a market share of mortgages (20%+), credit cards (25%+) and personal loans. It has more than 15 million users, most of them in Australia. Essentially, it is involved in the Australian payments ecosystem and financial market.
CBA share price
HR matters
For long-term investors looking to invest in great companies and hold them for 5, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and staff culture can lead to better retention of high-quality personnel and, in turn, a company’s long-term financial success.
A way in which Australian investors can be exposed to a company. Commonwealth Bank of Australia or ANZ Banking Group (ASX: ANZ) is to use an HR/Jobs website eg to search. Sec’s website includes data on company culture, including things like employee reviews. According to the latest data we pulled at CBA, for example, the company had an overall workplace culture rating of 3.4/5. more than The ASX Banking Sector has an average rating of 3.1.
CBA’s return on loans
ASX bank shares like CBA need deposits and good profit margins to make their business profitable. Meaning, a bank receives money from term deposit holders and wholesale loan investors and lends that money to homeowners, businesses and investors. What is the difference between a bank? pays What else is it for savers? Makes from A mortgage holder (for example) has a net interest margin or NIM. Remember: When it comes to NIMs, the wider the margin the better.
If you are planning to estimate the profitability of a bank like CBA or Macquarie Group Ltd (ASX: MQG), it’s important to know how much a bank lends and what it earns borrowers per dollar. This is why NIM is the most important measure of CBA’s profitability. Among the major bank shares on the ASX, we calculated an average NIM of 1.78% while Commonwealth Bank of Australia’s lending margin was 1.99%, meaning the bank had a better-Higher than average returns from lending to consumers compared to its peers.
The reason analysts study NIM so closely is that the Commonwealth Bank of Australia generated 85% of its total income (equivalent to income) from lending last year alone.
ROE: A measure of bank quality
Return on shareholder equity, also known as ‘ROE’, helps you compare a bank’s profitability to its total shareholder equity, as shown on its balance sheet. high ROE better. Commonwealth Bank of Australia’s ROE for the latest full year was 13.1%, meaning it generated $13.10 in annual profit for every $100 of shareholder equity in the bank. This was higher than the sector average of 9.35 percent.
Balance sheet protection
For Australian banks, the CET1 ratio (aka ‘common equity tier one’) is the most important. CET1 represents a bank’s capital buffer that can go towards protecting it from financial disaster – basically, it’s the proportion of total assets that are ‘liquid’ or readily available. Commonwealth Bank of Australia had a CET1 ratio of 12.3% last year, according to our numbers. This was higher than the sector average.
Determination of CBA share price
The Dividend Discount Model or DDM is one of the most effective ways to generate forecasts for ASX bank shares. To do DDM we have to take the bank’s last full year profit and then apply the risk rating. Last year the total profit was $4.65. Let’s assume that the CBA dividend payout grows at a constant rate each year into the future, somewhere between 2% and 4%. We will use multiple risk rates (between 6% and 11%) and then average the prices. The calculation we use is: Share price = Full year dividend / (Rate of risk – Rate of return).
| Growth rate | ||||
| 2.00% | 3.00% | 4.00% | ||
|
Hazard ratio |
6.00% | $119.00 | $158.67 | $238.00 |
| 7.00% | $95.20 | $119.00 | $158.67 | |
| 8.00% | $79.33 | $95.20 | $119.00 | |
| 9.00% | $68.00 | $79.33 | $95.20 | |
| 10.00% | $59.50 | $68.00 | $79.33 | |
| 11.00% | $52.89 | $59.50 | $68.00 | |
According to this quick and simple DDM model, CBA’s estimated average share price is $98.33. However, using an ‘adjusted’ dividend payout (expected future dividend) of $4.76 per share, which is the preferred measure because it uses forecasted profits, the price jumps to $100.66. The price compares to CBA’s current share price of $171.60. Since the company’s dividend is fully transparent, we can make further adjustments and make a valuation based on the ‘gross’ dividend payment (this is the value of the dividend including the franking credit). Using gross dividend payments, the estimated ‘fair value’ becomes $143.80.
This means that the CBA share price may seem expensive using our simple DDM model, but this is just one of the many steps you should take before making an investment decision. It is important to consider all the risks and ideas we present here, including the benefit of improving dividends and the positive effects of franking credits.
To learn more about analysis and evaluation, consider emailing our free investment report to you (keep reading). This should be one of many steps when making an investment decision. Consider reading at least two or three years of the Commonwealth Bank of Australia’s annual reports and then look for good investors and analysts who disagree with your view – a reliable way to find out if you’re making a solid decision based on rigorous analysis and considering alternative opinions. Finally, before going any further with CBA or ANZ shares, I recommend getting a copy of our free investment report.
