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Commonwealth Bank of Australia shares aren’t as safe as you think: Here’s why

Australian investors have made a fortune from holding onto their Commonwealth Bank of Australia (ASX: CBA) shares over the last six years or so. Since trading at around just $24 back in January 2009, shares of Australia’s largest bank have rallied nearly 240% to be trading above $81.00 today.

When you include dividends too, that return equates to an even more remarkable 314% – far outpacing the S&P/ASX 200 Index’s (Index: ^AXJO) (ASX: XJO) 52.5% return in that time. Needless to say, many Australians will have grown accustomed to the bank’s massive returns while many will no doubt expect to continue.

But I’m not convinced – not by a long shot.

Firstly, it should be noted that I’m not making any predictions or forecasts for the coming 12 months. Indeed, shares in each of the big four banks could continue to benefit as investors carry on with their hunt for lucrative, fully franked dividends. But for investors focused on the long term, the banks are not presenting as a good buy at today’s prices.

To begin with, it would be foolish to assume that low interest rates are here to stay. When they inevitably rise – whether that be next year or in 2016 – demand for loans could start to decline while the bank’s low bad debt charges will begin to rise, acting as downward pressure on the bank’s overall earnings.

You also need to consider the bank’s ability to grow its dividend payments. While Commonwealth Bank’s 4.9% fully franked yield looks appealing right now, the bank may struggle to grow or even maintain its payout rate should stricter capital requirements be enforced.

It’s something that Westpac Banking Corp’s (ASX: WBC) outgoing CEO Gail Kelly has warned could happen, while Australia and New Zealand Banking Group’s (ASX: ANZ) CEO Mike Smith has suggested interest rates on all loans could rise by 0.5% should those requirements be implemented, which would further stunt loan growth.

At its current price of $81.27, Commonwealth Bank’s shares are trading on a projected P/E ratio of 14.4x. While that may not seem that excessive, it is considering the bank’s limited growth opportunities over the coming years. Investors who buy now would be buying at the tip of the cycle and could unwittingly be committing themselves to years of lacklustre returns (or even declines).

While I would strongly suggest investors avoid buying shares in any of the big four banks right now, there is another high-yielding ASX stock which offers far greater growth potential and it’s trading at a far more compelling price.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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