CBA shares: 2 reasons to buy, and 2 to sell

The Commonwealth Bank of Australia (ASX: CBA) share price is one of the most watched within the S&P/ASX 200 Index (ASX: XJO), being the biggest ASX bank share. But, with its large size, is the company a major opportunity?

There is plenty to look at in the banking sector at the moment. Ever since COVID-19 came onto the scene, banks have had to deal with significant changes to the financial situation.

Investors that have held CBA shares for decades have done very well, particularly with all of the dividend income that it has dished out.

But, with the CBA share price up more than 16% over the last six months, could the bank be a solid buy?

Optimistic case for CBA shares

One of the key reasons why CBA shares could continue to do well from here is that interest rates are rising.

As a bank, the interest rate is a key part of its financials. It charges interest for customers and pays interest on a lot of the money that is held on deposit for customers.

CBA and many other ASX 200 bank shares are passing on the interest rate hikes to borrowers very quickly, while not passing on the overall increase to savers as quickly.

This is helping boost the CBA net interest margin (NIM) – it will be interesting to see how high CBA’s NIM can go during this period. The higher NIM can boost bank earnings, and investors often like to use profit as a guide for their thoughts on the CBA share price (and many other share prices).

As I’ve already mentioned, the CBA dividend has been very rewarding for investors and this could continue.

The broker Credit Suisse suggests that CBA could pay an annual dividend yield of 5.8% in FY23 and 5.9% in FY24.

Reasons to avoid

CBA has done very well over the decades. But, investors are now pricing at an exceptionally high level compared to other ASX banks.

For example, on Credit Suisse’s numbers, the CBA share price is valued at 17 times FY23’s estimated earnings.

But, Credit Suisse numbers put the Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price at under 10 times FY23’s estimated earnings, the Westpac Banking Corp (ASX: WBC) share price at 12 times FY23’s estimated earnings and the National Australia Bank Ltd (ASX: NAB) share price at 12 times FY23’s estimated earnings.

While the higher valuation of CBA shares may not necessarily mean it’s going to fall, it could be better value for investors to consider other ASX 200 bank shares.

I’m also keeping in mind that while the bank may earn higher margins in the short term, there’s a danger that the higher loan rates could mean that arrears and bad debts could rise in 2023.

For these reasons, I think it could be better for investors to wait for a better valuation on CBA shares.

The post CBA shares: 2 reasons to buy, and 2 to sell 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 recommended Westpac Banking. 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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