Try to determine a reliable assessment of Commonwealth Bank of Australia (ASX: CBA) Sharing is as much an art as it is a science. However, the research and evaluation process is arguably the most essential part of a successful investment and should not be overlooked.
CommBank of Australia or CBA is Australia’s largest bank, with a predominant market share in mortgages (24%), credit cards (27%) and personal loans. It has more than 15 million customers, including around 14 million in Australia. Basically, it is rooted in the Australian payments ecosystem and financial market.
CBA stock price may seem cheap, but here are easy ways to find it
Step 1. Assess the culture
For long-term investors looking to invest in great companies and hold them for five, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and a good staff can lead to better retention of high quality staff and, in turn, the long term financial success of a company.
One way for Australian investors to peek inside a company like Commonwealth Bank of Australia or ANZ Banking Group is to use HR/jobs websites such as To look for. Seek’s website includes company human resources data, including things like employee reviews. According to the most recent data we pulled from the ACB, for example, the overall workplace culture score of 4.1/5 was more … than the average ASX banking industry rating of 3.71.
Step 2. Ready
ASX bank stocks such as CBA need debt and good profit margins to make their business profitable. This means that a bank receives money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank is pay to savers and what made of mortgage holders (for example) is the net interest margin or NIM. Remember: when it comes to NIMs, the wider the margin, the better.
If you are considering forecasting profits from a bank like CBA or Macquarie Group Ltd. (ASX: MQG), it is essential to know how much money the bank lends and what it earns per dollar lent to borrowers. This is why the NIM is arguably the most essential measure of CBA profitability. Among the major banking stocks on the ASX, we calculated the average NIM to be 1.92%, while Commonwealth Bank of Australia‘s lending margin was 2.03%, meaning the bank produced a betterabove-average return on lending money to customers compared to its peers.
The reason analysts are studying the NIM so closely is that the Commonwealth Bank of Australia earned 78% of its total revenue (income-like) from loans alone last year.
Step 3. ABC return on equity
Return on equity or simply “ROE” helps you compare a bank’s profit to its total equity as shown on its balance sheet. The highest the RE the best. Commonwealth Bank of Australia’s ROE over the last full year was 11.2%, meaning that for every $100 of bank equity, it produced $11.20 in annual profit. . This was expected the industry average of 7.46%.
Step 4. Commonwealth Bank of Australia CET1 ratio
For Australian banks, the CET1 ratio (aka “common equity tier one”) is essential. CET1 represents the bank’s capital buffer that can help protect against financial collapse. According to our figures, the Commonwealth Bank of Australia had a CET1 ratio of 13.1%. This was above the industry average.
Step 5. Valuations using dividend payments
A Dividend Discount Model or DDM is one of the most effective ways to create a forecast for ASX bank stocks. To do a DDM, we need to arrive at a forecast of the bank’s dividends in the future (i.e. the next dividend for the full year) and then apply a risk rating. Assume that the ABC’s dividend payment increases at a constant rate each year into the future, somewhere between 2% and 3%. We will use multiple risk rates (between 6% and 11%) and then average the valuations.
According to this quick and easy DDM model, a CBA stock valuation is $59.48. However, using an “adjusted” or expected dividend payment of $3.98 per share, which is the preferred metric because it uses expected dividends, the valuation jumps to $67.64. The valuation compares to CBA’s current stock price of $95.17. Since the company’s dividends are fully franked, we can make an additional adjustment and make a valuation based on a “gross” dividend payment. Using gross dividend payments, which factors in franking credits, the projected valuation at $96.63.
This means that although the CBA stock price may look expensive using our simple DDM model, do not make a decision based on this article. Please go now and consider all the risks and ideas we have presented here, including the benefit of dividend growth and the good impact of franking credits. Consider receiving our free investment report by email (keep reading).