Why are CBA shares so high right now?

The Commonwealth Bank of Australia (ASX: CBA) share price has gone up by 15.5% since 3 October 2022. A strong performance by the major bank share. This compares to a rise of 8% for the S&P/ASX 200 Index (ASX: XJO).

There was a good run by a number of ASX bank shares including Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) as well.

The banking sector has been one of the better-performing sectors in 2022. That’s despite the economic pain from elevated inflation and the damage being done to asset values by higher interest rates.

The CBA share price is up 2% this year, while plenty of others have fallen such as Wesfarmers Ltd (ASX: WES) and Woolworths Group Ltd (ASX: WOW) which are down by 23% and 13% respectively in 2022.

What could be boosting the CBA share price?

In my opinion, it’s largely down to higher interest rates. The ultra-low interest rates during the COVID-19 pandemic were not helpful for bank lending margins, shrinking their profitability.

But, with higher interests, things are now looking up. Banks are increasing their loan rates faster than what it’s passing on to savers. This is increasing their net interest margins (NIM).

Banks get a lot of funding from savings accounts and term deposits. In FY22, deposit funding was 74% according to CBA. So it satisfied a “significant portion” of its funding from retail, business and institutional customer deposits.

The boost to the interest rate could add billions to CBA’s operating profit. In ANZ’s recent FY22 result, it said that in FY23 its net interest income could benefit from higher interest rates to the tune of around $1.5 billion in FY23 and $3.2 billion in FY25. ANZ is a smaller bank than CBA, so it could add even more for Australia’s biggest bank.

But, keep in mind that in the future, the banks may suffer from increased bad debts – not every household may be able to absorb these higher interest rates.

Is the major bank good value?

Coverage by The Motley Fool’s Bruce Jackson certainly doesn’t suggest so.

Earlier this year, on 10 August – when the CBA share price was $3 lower than it is today – Jackson said that “at today’s valuation, CBA shares look downright expensive, especially given the competitive environment and economic outlook”.

Then, this week, he covered some comments made by a fund manager:

The Chester High Conviction Fund said “banks are capturing the benefit of higher interest rates, without yet feeling the impacts of those higher rates on impaired loans”.

Yet the fund views banks as “leveraged exposure to the Australian economic cycle,” effectively sounding the alarm bells for bank shares should the economy weaken. The sharp increase in interest rates will hit many mortgage-holders from next year onwards as they transition off low fixed rate mortgages.

What is the CBA share price valuation today?

According to CommSec – which doesn’t get its numbers from CBA – the CBA share price is valued at under 19x FY23’s estimated earnings.

That does look quite pricey. I prefer the look of the NAB share price, which is valued at under 13x FY23’s estimated earnings.

The post Why are CBA shares so high right now? 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 positions in and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Westpac Banking Corporation. 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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