Although its performance in 2014 hasn't been quite as spectacular as in recent years, Commonwealth Bank of Australia (ASX: CBA) has still managed to outperform the broader market's returns.
Now trading at $82.70, the shares have risen 6.3% (11.5%, including dividends) which compares to a 3% rise from the benchmark S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). It has also beaten the returns of its major peers with the next best bank stock being Westpac Banking Corp (ASX: WBC), up 3.4% since the beginning of the year.
With 2014 nearing an end however, investors need to start turning their attention to 2015 and beyond. With that in mind, how will Commonwealth Bank of Australia's shares fare in 2015?
Housing Sector
Commonwealth Bank has benefited enormously from the low interest rate environment, in particular thanks to its dominant position in Australia's mortgage market. Interest rates are expected to stay low for the foreseeable future (some analysts have even suggested they will fall further in 2015), suggesting bad debt charges could remain under control and greater lending activity could be ahead.
Competition
Low interest rates clearly encourage borrowing, which in turn encourages competition amongst lenders to win over new customers. Competition has been incredibly aggressive more recently and it's eating into Commonwealth Bank's net interest margin (a measure of profitability on its loans). For the first quarter, the net interest margin was reported as being "marginally lower" and I would expect that trend to continue.
Dividends
The bank is tipped to pay $4.22 per share in dividends in FY15, indicating a 5.1% fully franked yield (grossed-up to 7.3%). Should interest rates remain low around the globe (particularly in the US) and the Aussie dollar remain low, foreign investors could certainly make their move, too.
However, investors also need to consider the effects of stricter capital requirements which are looking increasingly likely for the big four banks. Westpac has already indicated that its dividend could be under threat as a result of David Murray's Financial System Inquiry, and the same could be said for Commonwealth Bank, National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
Outlook
To get a good idea of how the market is viewing Commonwealth Bank as an investment prospect, you need to consider the reaction amongst investors following its Q1 results announcement. Despite its record-smashing quarter – which saw net profit jump 14% year-on-year – investors initially sold the stock down, before its price recovered later in the same session.
Although it is firing on all cylinders, investors are clearly wary of the lofty premium the stock commands. At $82.70, the stock is trading on a P/E ratio of 15.6x, which is excessive considering its limited growth prospects over the coming years – in addition to the increasingly likely stricter capital requirements.