Commonwealth Bank’s (ASX: CBA) third-quarter fiscal 2026 profit of AUD 2.7 billion fell 1% on the quarterly average of the first half. Two fewer days held back upside from loan growth and stable net interest margins, or NIMs, while an AUD 200 million increase in loan loss provisions weighed on the bottom line.

Why it matters: The update is largely as expected, with our fiscal 2026 profit forecast reduced modestly to include higher loan impairments. Even with the extra provisions, our fiscal 2026 loan impairments/loans forecast of 0.08% is well below our medium-term forecast of 0.15%.

  • The bank is increasing its loans broadly in line with the market, and at the same time successfully keeping up a higher mix of loans written directly, which is supportive of margins.
  • We expect changes to tax concessions for investors, mainly hitting existing properties, plus higher interest rates, which lower borrowing capacity, to slow housing credit growth to 3%-4% in fiscal 2027. In the 12 months ended March 2026, housing credit growth was robust at 7.3%, with investor at 9.6%.

The bottom line: We increase our fair value for wide-moat Commonwealth Bank by 5% to AUD 105, driven by the time value of money and a modest change to our cost of equity, now 8.9% from 9.0% previously.

  • While off from a record high of AUD 192 per share, and down 10% intraday on May 13, shares are materially overvalued. On a forward P/E of around 24 and a dividend yield of 3%, valuation multiples are difficult to reconcile with a mid-single-digit earnings growth outlook.
  • We are positive on the earnings outlook, summed up by a return on equity of 16% in fiscal 2030 against 13.5% in fiscal 2025. This includes loan growth slightly faster than the market, margin expansion as competitors making poor returns price less aggressively, and cost savings on digital investments.

Commonwealth Bank well-placed to navigate changes in economic conditions

Commonwealth Bank of Australia is the largest of Australia’s four highly profitable, wide-moat-rated major banks. It offers a full suite of banking services in Australia and New Zealand. In the long run, the bank has consistently increased shareholder wealth in favorable economic times. The loan book’s large weighting to home loans and the high proportion of customer deposits reduces risk on bad debts and sudden changes to funding costs.

While Australian housing is expensive and debt/household income ratios are high, we remain comfortable for several reasons. Tight underwriting standards, lender’s mortgage insurance, low average loan/valuation ratios, a high incidence of loan prepayment, full recourse lending, and a high proportion of variable rate home loans combine to mitigate potential losses from mortgage lending.

With cash rate increases to combat high inflation, the risk of higher credit losses has increased. It could also reduce demand for credit. We expect modest credit growth and margin improvement over the medium term. Operating expenses will continue to rise due to inflationary pressure and the bank investing to capture growth opportunities, this despite productivity improvements being realized.

Bad and doubtful debts expense peaked in first-half fiscal 2009. Elevated loan losses in fiscal 2020 were entirely due to loan loss provisions. With large provision balances, and economic conditions improving, loan losses are expected to be moderate in the short term.

A string of divestments plus strong organic capital generation see the bank retain a strong capital position even after completing share buybacks.

Bulls say

  • Commonwealth Bank of Australia’s well-managed net interest margins, sound asset quality, and strong balance sheet continue to consistently deliver solid financial results.
  • Costs have been increasing due to inflation and investments in technology, but in the longer term, we expect tighter control to support earnings.
  • Strong organic capital generation leave the bank well placed to make market share gains while still paying attractive dividends to shareholders.

Bears say

  • Increased regulatory, political and public scrutiny could erode the bank’s pricing power and over time, its wide economic moat.
  • Commonwealth Bank is a major beneficiary of transaction account funding, and competitors paying much higher rates could encourage more customer switching and increase the average cost of funds.
  • Slow GDP growth and highly indebted households could see credit growth slow further.