CBA.AX — Equity Research Report

CBA.AX • ASX • Banking

Commonwealth Bank of Australia

Australia's largest bank by market capitalisation • FY ends 30 June

Reference price: $160.57 (31 Dec 2025) — update before use ⬇

Method B • Bank Equity Valuation

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LTM Revenue

$28.8B

+5.5% vs FY24

LTM Net Profit

$10.4B

+6.9% vs FY24

ROE (TTM)

13.6%

CoE est. ~10%

NIM

2.04%

Dec-25 (vs 2.08% Dec-24)

CET1

12.3%

Well above reg. min.

1. Business Overview

Commonwealth Bank is Australia's largest bank by market capitalisation and one of the four major domestic banks alongside ANZ, NAB, and Westpac. It operates across retail banking, business banking, institutional markets, and New Zealand, with total assets of $1.41 trillion as at December 2025 — roughly equal to 55% of Australian GDP.

The franchise is best understood as a scale mortgage machine. Home loans represent the dominant asset class at $730 billion gross (70% of the $1.05 trillion loan book), underpinned by Australia's structurally undersupplied housing market. The bank earns most of its revenue from net interest income (NII) — $24.8 billion in the last twelve months — which represents 86% of total operating income. Fee and trading revenues provide the balance.

CBA's defining competitive edge is digital. With 9.4 million active digital clients (December 2025) and an industry-leading mobile app, the bank has built switching costs that have proven durable through multiple rate cycles. Management's "digital-first" strategy has translated into a superior cost-to-income (efficiency) ratio of 45.9% — the best among the major four.

Revenue Mix

Income Item	FY23	FY24	FY25	LTM	Growth (FY24→FY25)
Net Interest Income ($M)	23,111	22,824	24,023	24,784	+5.3%
Non-Interest Income ($M)	3,684	3,624	3,875	4,032	+7.0%
Total Operating Income ($M)	26,795	26,448	27,898	28,816	+5.5%
Loan Impairment Charges ($M)	1,344	802	726	725	–9.5%
Operating Expenses ($M)	10,946	11,283	11,871	12,206	+5.2%
Pre-Tax Operating Profit ($M)	14,505	14,363	15,301	15,885	+6.5%
Net Profit After Tax — Continuing Ops ($M)	10,096	9,481	10,133	10,403	+6.9%

Note: CBA's financial year ends 30 June. FY25 = July 2024 – June 2025. LTM = 6 months ended June 2025 + 6 months ended December 2025. All figures in AUD millions.

2. Segment Sum-of-the-Parts (SOTP)

SOTP for a bank values each lending and service division at an appropriate price-to-earnings multiple, reflecting differences in growth, risk, and capital intensity. CBA's five segments have materially different characteristics and deserve separate multiples.

Segment Asset Composition (December 2025)

Retail

Business

Inst.

Corp Ctr

Retail Banking $549B

Business Banking $273B

Institutional $215B

New Zealand $126B

Corporate Centre $190B

SOTP Valuation — Base Case

Segment NPAT is proxied from segment tax allocations using the group effective tax rate (~30%). Multiples reflect each segment's peer group and structural earnings quality.

Segment	FY25 NPAT (est.)	Bear Multiple	Base Multiple	Bull Multiple	Rationale
Retail Banking	$5,446M	15x	20x	25x	Dominant market share, mortgage scale, digital moat
Business Banking	$4,102M	12x	16x	20x	SME franchise, relationship banking, growing
Institutional Banking	$898M	10x	12x	14x	Cyclical, capital-intensive; discount to retail
New Zealand	$1,073M	10x	13x	15x	ASB brand strong but NZ peers at discounts
Corporate Centre	–$1,041M	10x	10x	12x	Cost centre drag; HQ costs, unallocated items
SOTP Equity Value	—	$140.2B	$188.9B	$234.4B
SOTP Per Share (1,672M shares)		$83.86	$112.96	$140.17

The base case SOTP of ~$113 per share sits 30% below the December 2025 market price of $160.57. Even the bull case at $140 implies modest downside. This premium is a deliberate market choice — CBA commands one of the richest valuations of any major bank globally, for reasons we explore in the multiples section.

3. Economic Profit & Residual Income

Economic Profit (EP) measures whether CBA earns above its cost of capital — the true test of whether management is creating or destroying shareholder value. For a bank, EP = Common Equity × (ROE − Cost of Equity).

Economic Profit Component	Value	Notes
Common Equity (Dec-25)	$77,232M	Book value attributable to shareholders
Return on Equity (ROE, TTM)	13.64%	LTM net income / average equity
Estimated Cost of Equity	~10.0%	Risk-free 4.3% + β0.90 × MRP 6.3%
EP Spread (ROE − CoE)	+3.64%	Positive — CBA creates value above its cost
Annual Economic Profit	$2,811M	Equity × spread
PV of Economic Profits (5% growth, 10% CoE)	$56,225M	EP ÷ (CoE − growth) capitalised in perpetuity
Residual Income Equity Value per Share	$79.81	Book equity + PV(EP) ÷ 1,672M shares

Justified P/B check: If ROE = 13.64% and CoE = 10%, the justified price-to-book multiple is 1.36×. CBA trades at 3.48×. The market is paying for $189.9 billion of future economic profit creation that does not yet exist — implying CBA's EP must roughly triple or sustain at current levels for decades. This is the core valuation tension in the stock.

Historical ROE Trend

Period	ROE	ROA	Cost-to-Income	NIM
FY22	13.7%	0.85%	41.6%	2.10%
FY23	18.9%	1.11%	43.9%	1.99%
FY24	13.1%	0.76%	45.8%	2.08%
FY25 (est.)	13.4%	0.77%	45.2%	2.06%
LTM (Dec-25)	13.6%	0.77%	45.9%	2.04%

ROE spiked to 19% in FY23 as the Reserve Bank's rate hiking cycle sharply expanded NIM. That tailwind has since faded as deposit pricing normalised and competition intensified. ROE has settled in the 13–14% range — healthy but not spectacular, and a meaningful step down from the 18–20% seen pre-COVID.

4. Dividend Discount Model (DDM)

For a mature bank like CBA, the DDM is the cleanest intrinsic value approach. CBA pays 100% franked dividends with a payout ratio of approximately 80%, making the dividend a reliable proxy for distributable earnings.

DDM Assumption	Bear	Base	Bull
FY25 DPS Gross (starting)	$4.83	$4.83	$4.83
Stage 1 Growth (5 years)	2.0% p.a.	5.0% p.a.	7.0% p.a.
Terminal Growth Rate	2.0%	3.0%	3.5%
Cost of Equity	11.5%	10.0%	8.5%
Intrinsic Value Per Share	$51.86	$77.37	$116.42

Key DDM sensitivity: The spread between bear ($52) and bull ($116) is driven primarily by the cost of equity assumption. At $160.57 (Dec-25 price), the market is implicitly pricing CBA on a CoE well below 8% — consistent with the bank being perceived as quasi-utility infrastructure in Australian portfolios. If the risk-free rate falls materially (RBA easing), this multiple can be sustained. If rates stay elevated, compression risk is real.

5. Multiples Benchmarking

Cross-checking intrinsic models against market multiples is essential for a bank, where accounting complexity makes enterprise value multiples less relevant than for industrial companies.

Multiple / Metric	Bear ($)	Base ($)	Bull ($)	CBA Market	Peer context
P/B Multiple — LTM BVPS $46.19	1.3× → $60	2.0× → $92	2.8× → $129	3.48× → $161	ANZ/NAB/WBC trade 1.1–1.6×; CBA's 3.5× is a global outlier
P/Tangible Book — TBVPS $41.23	1.5× → $62	2.2× → $91	3.0× → $124	3.90× → $161	Goodwill of $5.3B; tangible book premium even steeper
P/E Multiple — LTM EPS $6.18	11× → $68	14× → $86	18× → $111	26× → $161	Global bank avg 10–13×; CBA's 26× reflects quality + franking
P/PPOP — PPOP ~$15.1B	6× → $54	9× → $81	12× → $108	17.8× → $161	CBA's pre-provision earnings multiple is elevated cycle-adjusted
Gross Dividend Yield — DPS $4.83	—	—	—	3.01% gross	4.31% (incl. franking). RBA cash rate ~4.1% → thin premium to risk-free

The franking premium: Australian resident investors (particularly superannuation funds) can claim the 30-cent franking credit on CBA's dividends. The grossed-up yield (~4.3% for the period) more closely approximates the risk-free rate, helping explain why CBA's P/E appears lower on a franking-adjusted basis than a raw 26× suggests.

6. Football Field — Valuation Summary

Method	Bear	Base	Bull	Range vs Market ($160.57)
DDM	$51.86	$77.37	$116.42	$0 Mkt
SOTP (P/E by segment)	$83.86	$112.96	$140.17
P/B Multiples	$60.05	$92.38	$129.33
P/E Multiples	$67.98	$86.52	$111.24
Economic Profit / Residual Income	—	$79.81	—
Market Price (31 Dec 2025)	—	$160.57	—	Market trades at 25–100% premium to intrinsic range

Valuation verdict: Every intrinsic method places CBA's fair value materially below its market price. The premium is real and persistent, sustained by three structural forces: (1) 100% franking that inflates after-tax yield for domestic investors; (2) CBA's position as a proxy for Australian economic exposure — institutional investors must-own it; and (3) digital leadership that justifies a modest quality premium. None of these factors justify a 3.5× P/B on their own. The stock is rich. The question for investors is whether the premium closes — and historically, it has proven remarkably sticky.

7. Red Flag Analysis — Allen/Plato Framework

The Allen/Plato framework systematically screens 12 risk categories for early warning signals. Each is rated FLAG WATCH or CLEAR.

#	Category	Rating	Assessment
1	Negative Operating Cash Flow	WATCH	Group OCF was negative in FY25 (–$825M combined) due to loan book growth and deposit movements. Structurally normal for a growing bank — OCF is not a meaningful measure of banking profitability. Individual half-year OCF swings are large. 1H FY26 OCF improved to +$1.7B.
2	Earnings–Cash Flow Divergence	WATCH	NPAT of $10.4B (LTM) diverges significantly from reported OCF. For banks, this is expected — loan originations and deposit flows run through operating activities. No earnings quality concern. Statutory vs cash earnings gap (~$300–500M) warrants transparency monitoring.
3	Excessive Leverage / Capital Adequacy	CLEAR	CET1 12.3% vs APRA minimum 8% (a $21.7B buffer). LCR 132%, NSFR 117%. Loan-to-deposit 1.04×. All metrics comfortably above regulatory minimums. Capital position supports buybacks and dividends.
4	Insider Selling	CLEAR	Three insider transactions visible in February 2026, all purchases. Chairman Paul O'Malley bought 700 shares at $125.19 ($87.6K). Director Julie Galbo purchased 62 shares at $125.88. Director Katherine Howitt acquired 67 shares. No selling visible. Modest buys but directionally positive.
5	Executive Remuneration	WATCH	Stock-based compensation (SBC) annualised ~$213M pre-tax based on recent halves. This is ~2% of NPAT — elevated in absolute dollar terms. Post-Royal Commission reforms have improved pay governance significantly. Long-term incentive alignment is appropriate; absolute quantum remains high relative to Australian corporate norms.
6	Governance Quality	WATCH	CBA was a central focus of the 2018–19 Banking Royal Commission, including a 2017 AUSTRAC settlement of $700M (then-record). Governance overhauling under subsequent management has been genuine and sustained. APRA and ASIC oversight remains intensive. This is a legacy watch item rather than an active concern.
7	Related-Party Transactions	CLEAR	No material related-party concerns in recent disclosures. Equity-accounted associates are normal banking relationships. Inter-segment allocations are standard group consolidation practice.
8	Auditor Quality	CLEAR	Audited by a Big 4 firm. No audit qualifications or adverse opinions. CBA's audit firm had no involvement in the PwC tax consulting scandal that affected a separate consulting entity. Clean opinion history.
9	Aggressive Growth Expectations in Market Price	FLAG	At 3.48× P/B, the market implies CBA must sustain or grow Economic Profit materially from current levels for decades. The justified P/B on current ROE and CoE is only 1.36×. Current price implies EP growing ~4–5× from today's level ($2.8B) or sustaining at $10B+ in perpetuity. This represents aggressive growth expectations baked into the share price.
10	High Beta / Systemic Correlation	WATCH	At ~9–11% of ASX 200, CBA's price movements are self-reinforcing — index rebalancing and passive flows amplify both rallies and sell-offs. Beta ~0.9 vs ASX 200. CBA is effectively a macro proxy for Australian housing, employment, and RBA policy. Concentration risk for domestic equity portfolios is significant.
11	Non-Standard Financial Metrics	WATCH	Management reports "cash earnings" as the primary metric, excluding treasury shares, software amortisation, and one-off items. Cash EPS is typically 5–8% higher than statutory diluted EPS. While industry-standard, the gap creates opacity — analysts need to be explicit about which earnings basis they're capitalising in any multiple calculation.
12	Credit Quality / Receivables	WATCH	NPL ratio has risen to 1.02% (Dec-25) from 0.84% (Jun-24) — a gradual but clear upward trend. Provision coverage (reserves/gross loans) is 0.59%, thin by global standards. Net charge-off rate of 0.06% remains ultra-benign. The primary tail risk is Australian household debt (~185% of income) combined with mortgage resets from fixed to variable rate — well-documented but still unresolved.

Red Flag Scorecard

Flags

Watches

Clears

VERDICT

Below danger threshold (8+ flags). The single flag is valuation-driven, not structural. Watch items are predominantly sector-wide rather than CBA-specific.

8. Savings Account Test — Bank-Adapted

The Savings Account Test asks: if this stock were a bank account, what interest rate would you be earning? For a standard company, we compare FCF/EV yield to the risk-free rate. For a bank, the closest equivalent is the earnings yield (net profit/market cap), since banks are capital-intensive and free cash flow is not a useful concept in the traditional sense.

Your "Interest Rate" on CBA

3.77%

LTM earnings yield ($10.4B ÷ $268.7B market cap)

Grossed-up Dividend Yield (incl. franking)

4.31%

Gross dividends ÷ price (incl. imputation credits at 30%)

Risk-Free Rate (10Y ACGB, approx.)

~4.3–4.5%

Australian government bond — zero credit risk

ASX 200 Earnings Yield (benchmark)

~5.5%

Broad market comparison (price ÷ forward earnings)

Savings Account Verdict — DOES NOT PASS on raw earnings yield. At 3.77%, CBA's earnings yield is below the risk-free rate. The fully-franked dividend yield (4.31%) barely exceeds government bonds, and lags the broad market earnings yield by ~175 basis points. You are accepting less current income than a government bond offers — betting that CBA's earnings grow fast enough to compensate over time. This is a plausible but optimistic bet at current prices. For a risk-free rate-adjusted investor using the franking credit, the adjusted yield is marginally competitive — but only marginally.

Comparison Point	Rate	CBA Premium/(Discount)	Verdict
CBA earnings yield (raw)	3.77%	—	—
10Y government bond (risk-free)	~4.4%	–63bps below risk-free	Negative premium
Gross dividend yield (incl. franking)	4.31%	–9bps vs risk-free	Marginal pass
ASX 200 earnings yield	~5.5%	–173bps vs market	Significant discount to market
Major bank peer earnings yield (ANZ/NAB/WBC)	~7.5%	–373bps vs peers	Material premium paid for CBA quality

9. Bull, Base & Bear Scenarios

Three distinct macro-business scenarios drive materially different outcomes over a 3-year horizon.

🐂 Bull — $130–145

~$138

Probability: ~20%

Rate cycle tailwind returns. RBA cuts rates by 150bps over 2025-26, stimulating mortgage demand. NIM recovers to 2.2%+ as fixed-rate roll-off and variable repricing outpace deposit cost increases. Loan growth accelerates to 7-8%. Digital monetisation (Buy Now Pay Later, open banking) adds material non-interest revenue. Credit stays ultra-benign — unemployment peaks at 4.5%. EPS grows 9–10% CAGR. P/E multiples expand to 28–30× on lower discount rates. Franking remains 100%.

📊 Base — $95–120

~$108

Probability: ~50%

Steady state with modest re-rating. RBA cuts to neutral (2.5–3%), NIM stabilises at 2.0–2.1%. Loan growth 4–5% tracking nominal GDP. Cost-to-income stays ~45% with productivity gains offsetting inflation. Credit losses normalise modestly from current lows (charge-offs 8–12bps). EPS grows 4–5% CAGR. Market starts pricing CBA more in line with global bank peers, compressing P/E from 26× toward 20×. Multiple compression offsets earnings growth — modest share price upside over 3 years.

🐻 Bear — $55–80

~$67

Probability: ~30%

Housing stress & multiple collapse. Australian household debt reaches breaking point — 30%+ of mortgages are variable rate, and unemployment rises above 6%. Impairment charges spike (50–80bps vs current 6bps). NIM compressed further by competition and rate cuts. Operating leverage works in reverse as revenue falls on fixed cost base. EPS declines 10–15%. Global rerating of bank equities (as seen in 2022–23) drags CBA's P/E toward 15×. Share price corrects 40–60% to reflect genuine fundamental value.

Asymmetric risk profile: The bear scenario ($67) is 58% below the December 2025 price; the bull scenario ($138) is 14% below. This asymmetry — where the downside is 4× the upside — is the defining risk of owning CBA at current levels. You need a specific view on multiple expansion or exceptional earnings growth to expect the stock to deliver market-beating returns from here.

10. Balance Sheet Snapshot

Balance Sheet Item	Dec-25	Jun-25	Jun-24	Commentary
Total Assets	$1,408.7B	$1,353.8B	$1,254.1B	Growing at ~6% p.a. — primarily loan book expansion
Gross Loans	$1,049.0B	$1,015.9B	$934.4B	Mortgages $730B (70%), Business $302B (29%), Consumer $17B
Loan Loss Reserves	$6.1B	$6.2B	$5.9B	0.59% coverage — benign credit environment maintained
Investment Securities	$253.0B	$228.7B	$195.1B	Liquidity buffer; growing rapidly as RBA bond purchases wind down
Customer Deposits	$1,003.8B	$958.0B	$903.8B	Stable deposit franchise; non-interest deposits $121B (12%)
Wholesale Funding	$219.1B	$217.3B	$184.2B	Long-term wholesale debt; diversified across currency and tenor
Common Equity	$77.2B	$78.8B	$73.1B	Stable — buybacks partially offset retained earnings growth
CET1 Ratio	12.3%	12.3%	12.3%	Consistent well above 8% regulatory minimum (~$21.7B buffer)

Commonwealth Bank — Plain English Summary

For anyone who wants to understand this company in 90 seconds — no finance degree required.

What does CBA actually do?

Commonwealth Bank lends money to Australians — mostly home loans — and makes a profit on the difference between the interest rate it charges borrowers and the rate it pays depositors. It's Australia's biggest bank, holding about $1 in every $5 of Australian mortgages. It also runs the CommBank app, which is one of the most popular apps in the country, with 9.4 million Australians using it regularly.

Why would you care about this company?

CBA is a staple of almost every Australian investment portfolio and superannuation fund. It pays large, fully-franked dividends every year ($4.83 per share gross in 2025), which means you get back part of the company tax already paid — a meaningful bonus for Australian investors. It's also been one of the most reliably profitable businesses in Australian history, earning over $10 billion in profit every year.

Numbers that matter

What	Number	What it means
Annual profit	$10.4B	One of Australia's most profitable businesses
Annual dividend (gross, incl. franking)	$4.83/share	Paid twice a year; 100% tax-paid
Total home loans on book	$730B	A massive slice of Australian housing
Digital customers	9.4M	Largest digital banking user base in Aus
Capital safety buffer	CET1 12.3%	Very well capitalised; can absorb big losses
Return on shareholders' money	13.6% p.a.	Earns decent returns — but costlier at today's price

What is it worth?

This is the tricky part. Most standard valuation approaches put CBA's fair value somewhere between $75 and $130 per share — depending on how optimistic you are about Australia's housing market and interest rates. The December 2025 market price of $160.57 sits well above that range.

The market is paying a premium because: (1) Australian super funds must hold CBA regardless of price; (2) the fully-franked dividends are worth more than they look to domestic investors; and (3) CBA's digital banking is genuinely world-class. None of this makes $160 wrong — it just means you're paying a lot for a great business, and the future needs to be bright for you to get a great return from here.

Warning signs

The main thing to watch is housing. CBA's fortunes are closely tied to Australian property — if unemployment rises sharply and mortgage defaults spike, the bank's profits could fall significantly. The bank is also carrying a premium share price that leaves little room for disappointment. We flagged one red flag: the market's growth expectations are very ambitious at current prices. Governance has improved markedly since the Banking Royal Commission in 2018–19, but regulatory scrutiny remains ongoing.

Bottom line

CBA is a magnificent franchise — one of the best-run, most digitally advanced banks in the world relative to its size. The business model is durable, the dividend is reliable, and the capital position is rock solid. But at today's price, you're paying for all of that excellence and then some. The stock looks expensive relative to what the business actually earns. If you already own it, hold. If you're considering buying for the first time, be honest with yourself that you're making a bet on continued multiple expansion — and markets don't always cooperate.

CBA.AX Equity Research • Method B (Bank Equity Valuation) • Data as at 31 December 2025 • Prepared for educational purposes only • Not financial advice