Shareholders in Australia’s largest bank have rightly been cheering the 200% plus gains (including dividends) they have made from investing in the Commonwealth Bank of Australia (ASX: CBA) over the past five years.
It’s almost hard to believe shares in Commonwealth Bank were changing hands for around $35 back in May 2009. Shares last closed on Friday above $80, having recently topped out at $81.29.
For some time now, we’ve been negative on the big four banks, ANZ Bank (ASX: ANZ), Commonwealth Bank, National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) arguing that they are the most overpriced banks in the world. But as some legendary investors and economists have noted, the market can remain irrational for long periods of time – making our negative views look a tad silly.
Until their share prices crash that is.
Now many investors will say that there’s very little chance of an investment in the banks going sour, after all, they’ve performed admirably for decades, despite what the economy has thrown at them. What investors need to remember is that Australia hasn’t faced a recession in more than 20 years, our unemployment rate is still very low, interest rates and bank bad debts are at record lows and our property market hasn’t had a strong downturn for many years. Ok, it hasn’t grown much in some years, but it’s still managed to grow over the long term.
Investors also need to remember that banks are highly leveraged businesses and a downturn in the economy could result in rising interest rates, higher unemployment, more bad debts and significant downward pressure on the bank share prices. You only have to look at what happened in the UK, with the government forced to bail out some of their banks, resulting in shareholders being sacrificed.
Holding money in bank shares is also very different to a bank deposit in terms of risk. They are definitely not the same, despite what investors think.
While Commonwealth Bank shareholders have been cheering so far, they also need to be aware that risks are rising. Should you want an alternative to the fully-franked dividends offered by the banks, then we have what we think is an excellent idea for you.
Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga