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2 reasons I’m not buying Commonwealth Bank of Australia shares in March

In my opinion, the Commonwealth Bank of Australia (ASX: CBA) share price is too high considering the risks involved.

Risks to the CBA Share Price

In addition to all the regular risks that come with sharemarket investing, bank shares like CBA are often scrutinised for their reliance on rising house prices.

It makes sense, the higher prices go the richer people feel. The more equity they have in their house, the more they can borrow. It’s a self-fulfilling cycle.

But the cycle winds up and up and up until something no longer fits and it comes undone in dramatic fashion.

Given the concerns regarding house prices, I think it would be fair to assume that CBA’s profits are on the higher side of the cycle average. Meaning, if we are moving in cycles and house prices are high, chances are, its profits are above the ‘average’ relative to if house prices hadn’t just risen. So, a smart investor would adjust for that. 

Of course, it’s not easy to identify what the cycle effect is, and what a normal level of profit would look like.

I should also say that making that assumption doesn’t mean house prices will fall. But the odds are that CBA’s profits will not continue to rise at the same pace every year.

Looking around the market, Commbank’s rivals National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) might also be in a similar position. Their costs for bad debts are seriously low, yet they are beginning to raise interest rates on loans because they are getting squeezed.

Valuation

I said I had two reasons for avoiding CBA shares but they are intertwined. The second reason I’m not a buyer of CBA shares today is valuation.

Risks are fine — there is a price for everything. But I’m not prepared to pay 2.4 times the value of CBA’s net assets (think: loans, credit cards, buildings, etc.) when there is a big risk to the downside. In my mind, a valuation of 2.4 times its net assets is very high. The Australian banking sector average is 1.35 times. Lower equals better, typically.

Foolish Takeaway

Previously, I have said that — so long as my portfolio is NOT overexposed to the banking sector — I would hold CBA shares in 2017. For the record, I don’t hold CBA shares in my portfolio, but if I did I would keep holding on — for now. However, at the same time, I’m not a buyer because I think there are better opportunities available on the market.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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