Why I think CBA is one of the best ASX bank shares

Commonwealth Bank of Australia (ASX: CBA) shares are often seen as one of the best ASX bank shares. I’d agree with that assessment for a few different reasons, which I’ll explain in this article.

Investors have a lot of choice between banks on the ASX, such as ANZ Group Holdings Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB).

There are three key reasons why I think CBA is great.

Strong return on equity

For a bank, CBA has a solid return on equity (ROE). The ROE doesn’t directly say how good the CBA share price returns or dividends are going to be, but it’s a useful indicator.

The ROE tells us how much profit the business is making for how much shareholder money is retained in the company. If the ROE is increasing, that’s showing the business is making more profit for how much shareholder money is within the company, which is a promising sign.

In the 2023 annual result, CBA reported its ROE improved 130 basis points (1.30%) to 14% thanks to higher profits and lower share count. If CBA continued seeing an ROE of 14%, it’d suggest CBA would make a 14% return on the additional profit it retained, which is a good return.

Compare this to Westpac – in FY23 it reported ROE of 10.1%, considerably below CBA’s.

Good dividend record

CBA isn’t known for having a huge dividend yield compared to other ASX bank shares, partly because of its higher price/earnings (P/E) ratio.

But, I think the past four years have shown CBA’s ability and commitment to maintaining and growing the dividend as much as it can. The COVID-impacted year of 2020 saw a dividend cut of around 31%, but most years since 2010 have seen an increase, with the rest seeing the dividend maintained.

At the current CBA share price, it has a trailing grossed-up dividend yield of 5.6%. That’s better than what someone can get from a term deposit from CBA.

Business growth

CBA has built up a large market share in household lending and deposits.

The biggest ASX bank share is looking to grow in business lending. The commercial banking side of the Australian loan system is large and offers a lot of growth potential for CBA, if it can grow its market share here.

This was evident when CBA reported in the first quarter of FY24 when it said that its business lending grew by 11.4% or $14.5 billion in dollar terms. This was 1.4 times the overall lending system, which means it’s gaining market share in that sector.

If CBA can keep growing at a good pace in this area, it means the business can unlock stronger profits and put money towards an area where it can leverage its scale.

Foolish takeaway

There is a lot to like about CBA shares, but the one thing I’m wary of is the valuation. It’s now valued at 20 times FY24’s estimated earnings. That seems excessive, even if we allow for a bit of a premium between CBA and other ASX bank shares. I’d be happier to buy NAB shares for now because of their quality and lower valuation.

The post Why I think CBA is one of the best ASX bank shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. 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 Scott Phillips.

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