Should you buy Commonwealth Bank of Australia?

After nearly three months, Commonwealth Bank of Australia (ASX: CBA) remains the only major bank still trading in the red for 2014.

While Westpac Banking Corp (ASX: WBC) has extended its stellar run from 2013 having already added a further 6% this year, Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have climbed 1.4% and 1.1% respectively. Commonwealth Bank on the other hand is trading at $76.48 a share, down 1.7% compared to its $77.80 price tag entering into 2014.

Unfortunately, the fall in share price does not present investors with an attractive buying opportunity. After hitting a high of $79.88 late last year, it was described as being “priced to perfection” with a P/E ratio touching on 15 times, while its major rivals were also ranked amongst the most expensive banks in the world. Its strong rally even saw it overtake BHP Billiton Limited (ASX: BHP) as Australia’s largest corporation by market capitalisation at $122 billion.

What is also unfortunate is that it may be a while before it falls to a more reasonable price range. The company still offers a fully franked 5% dividend yield which is keeping the market interested, while it is also set to post a record profit for the year with interest rates and bad debts remaining at record lows. In fact, when it delivered its half-year results early last month, it recorded a cash profit of $4.268 billion, while it is expected to top $8.4 billion for the full year.

Foolish takeaway

While there is no questioning the strength of Commonwealth Bank, you also need to be aware that their enormous profits are being bolstered by the low levels of bad debt which will inevitably rise when interest rates increase. Although the bank’s shares could certainly climb higher in the short-to-medium terms, it may be wise to remain on the sidelines until they are more reasonably priced for long-term success.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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