Commonwealth Bank of Australia (ASX: CBA) will deliver its full year results to the market on Wednesday, and the outcome could have significant implications on investor sentiment and, indeed, the overall performance of the S&P/ASX 200 Index (INDEXASX: XJO).
Given the significant weighting the bank holds in the index, a poor result could drag the market lower and take investor sentiment with it. This is particularly the case given Commonwealth Bank's excessive valuation, which currently has the stock trading on a projected Price-Earnings ratio of 15.1 and a Price-Book ratio of 2.88.
With a market capitalisation of just under $130 billion, Commonwealth Bank holds the largest position in the ASX 200 and represents roughly 9.7% of the entire benchmark index. A poor result could also impact the share price of its three primary rivals, namely National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) which, when combined, hold 30.1% of the index.
Investors will be hoping for a strong cash profit which should exceed $8.5 billion for the first time in the bank's history, strong dividend growth (which is important to the share price given the low interest rate environment) and a strong increase in lending activity, particularly in the mortgage division.
Furthermore, the company's bad debt situation will also be looked at closely. Borrowers have taken advantage of the low interest rates to pay down their debts which has resulted in record low bad debt charges. These lower costs have been one of the primary drivers behind the bank's enormous profits in recent times and any signs that they could soon start to rise would impact investor confidence.
Commonwealth Bank shares have been described as "priced for perfection" and are, by most measures, the most expensive bank shares in the world. As such, a weaker-than-anticipated result could well see a large pullback in the share price which could result in the broader market dropping in the near term.
A better bet than Commonwealth Bank
Despite the bank's generous dividend yield, I would not be buying the shares right now. The good news is, the Motley Fool's top analyst, Scott Phillips, has uncovered an excellent alternative. It's a small-cap stock with fantastic growth potential and a 7% grossed-up dividend yield!
