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Why the Commonwealth Bank of Australia share price is falling

The Commonwealth Bank of Australia (ASX: CBA) share price has fallen 2.6%  following the release of its third quarter financial update.

Here are the key takeaways from CBA’s brief market update:

  • Cash profit was $2.4 billion, up from $2.3 billion last year
  • Deposit funding was 67%, up from 64%
  • Regulatory capital ratio came in at 9.6%, versus 10% last year
  • The bank grew above-average in home and business lending

Commonwealth Bank’s trading update comes on the back of the financial reports from each of its peers, including National Australia Bank Ltd. (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

While CBA’s trading update is nothing more than a look at the hood — that is, it’s not even enough to be a ‘look under the hood’ — there were some noteworthy figures in today’s update.

For example, it was pleasing to see the bank’s increased CET 1 capital ratio. This is a measure of a bank’s regulatory capital buffer against market shocks.

Currently, each of the major banks is bracing for further increases in the requirement to hold capital. By holding more capital now CBA is potentially lessening the blow when changes finally arrive.

Also pleasing was the fall in CBA’s loan impairment expense, which fell to 0.11% of all loans, down from 0.17% last half. Lower impairment expenses mean that fewer customers are already behind on repayments.

However, looking ahead, to what causes loan impairment expenses to arise; the percentage of CBA’s home loan customers falling more than 90 days behind on their repayments has increased to 0.57% of all loans, as can be seen in this graph.

CBA bad debts

Source: CBA March Trading Update, 2017

The bank attributed the result to weaker conditions in Western Australia.

Another concern may be a potential fall in profit margins. The bank alluded to margin pressures, citing competition and funding.

“Net interest income growth (pcp) supported by volume growth in key markets, offsetting margin pressures,” the bank’s update read.

Should you buy CBA shares?

If there are two things to take from recent bank results, it is that competition is only getting fiercer and the banking system has plenty of headwinds (e.g. competition, rising funding costs, increased regulatory pressures and slowing house prices), in my opinion. 

Altogether, it means investors should demand a healthy discount on the value of bank shares, before buying. In other words, given all the risks, you should buy bank shares for significantly less than what they are worth to compensate for the potential downside. In my opinion, CBA shares are expensive. Therefore, I am not a buyer at today’s prices.

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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's parent company Motley Fool Holdings Inc. owns shares of National Australia Bank Limited. 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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