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5 key risks facing Commonwealth Bank of Australia

Shares of Commonwealth Bank of Australia (ASX: CBA) have managed to recover some of their losses over the last two days but they are still sitting well below their all-time high, recorded in July this year. Before you start thinking that this is the beginning of a rebound however, there are a number of risks facing the business which you should first consider.

1) Falling AUD. First and foremost, the Australian dollar has plummeted over the last month and analysts believe it has plenty of room left to fall. This will likely see more foreign investors withdraw their money from the local market or, more specifically, from the nation’s highest yielding stocks which have driven the market higher in recent years.

2) Iron Ore. The tumbling iron ore price will only exacerbate this. While the falling price will not directly impact the bank, it will act to reduce Australia’s GDP by billions of dollars which will not only make the market less attractive for foreign investors, but also impact the confidence of borrowers. Bad debt charges could also rise strongly as a result – something investors haven’t needed to worry about in recent years.

3) Housing Market. One of the most concerning headwinds facing the banking sector – and in particular, Commonwealth Bank and Westpac Banking Corp (ASX: WBC) – is Australia’s inflated property market. A huge upswing in mortgage lending has helped drive the banks’ profits higher recently but, should cracks start to appear, they could also cause the banks’ shares to fall heavily in price.

4) Capital Requirements. Who could forget the capital requirements likely to be imposed on Australia’s big four banks. Deemed “too big to fail”, the banks may be required to hold up to $30 billion more capital in reserve in order to brace against a potential economic downturn. Not only would this limit the banks’ return on equity, it could also affect their ability to grow or even maintain their current dividends.

5) Tech Giants. Until recent years, investors have been under the impression that the banks offer an essential service, and would therefore never be threatened by non-bank entities. However, that theory has now been scrapped with mobile payments tipped to skyrocket over the coming years. The recent introduction of ‘Apple pay’ is one such threat while PayPal, Facebook Inc. and Google Inc. could also knock the banks off their perch in the years to come.

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