I'm still avoiding Commonwealth Bank of Australia (ASX: CBA), and there are a number of reasons why.
The stock's excessive valuation is still a key issue. Although it has significantly dropped in price since late July, investors who buy today are still paying too much for a stock that could well underperform the market for years to come.
Commonwealth Bank's shares currently boast a P/E ratio of 14.1x. While that is lower than the average ASX 200 company, the bank's ability to grow earnings over the coming years is also far more limited, making it an expensive prospect. This is reflected in its Price-Earnings Growth (PEG) ratio which currently sits at 2.5x, compared to the market's average of 1.6x.
Earnings growth could not only be impacted by rising bad debt charges and aggressive competition in the sector, but also by the possible implementation of stricter capital requirements imposed on the big four banks. This could also impact their ability to grow or even maintain their current dividend distributions.
The bank's exposure to Australia's red-hot property sector is also an area of huge concern. Commonwealth Bank and Westpac Banking Corp (ASX: WBC) both control the majority of the local mortgage market and should cracks start to appear in the sector, both could be hit – hard.
Finally, it is also possible we will see a further sell-off by foreign investors. With the Australian dollar (AUD) tipped to fall another 10% or so from its current level and speculation regarding an increase in US interest rates, the bank's dividend yield could lose some of its international appeal resulting in another fall in share price.
