Commonwealth Bank of Australia (ASX: CBA) has been an outstanding performer for equity investors in recent years. Offering a juicy, fully franked dividend yield and growing profits, investors have flocked towards the major bank's stock and driven it to record heights.
Although its performance in 2014 hasn't been quite as spectacular as it was in 2012 and 2013, it has still managed to outperform the benchmark S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Having jumped 3%, it's also outperformed each of its rivals with the next best performer being Westpac Banking Corp (ASX: WBC), which is down 0.3%. National Australia Bank Ltd. (ASX: NAB) has been the worst performer with the stock down 7.4% since the beginning of the year.
However, with just under six weeks remaining in the 2014 calendar year, investors need to start turning their attention towards 2015. Will Commonwealth Bank be able to continue its magnificent trend in 2015, or will the stock be one for investors to avoid?
The Outlook
Commonwealth Bank, along with each of its peers, has benefited from the low interest rate environment. Low rates have helped to drive loan growth while bad debt charges have also declined as more borrowers have repaid their dues.
This trend could certainly continue into 2015. As Bruce Jackson, General Manager of The Motley Fool Australia highlighted, interest rates could be cut even further in 2015 – possibly as low as 1.5%. That would certainly benefit Commonwealth Bank, which controls the largest portion of Australia's mortgage market.
On the other hand, such a move would also result in even more aggressive competition across the finance sector. The banks are already recognising restricted net interest margins with Commonwealth Bank even reporting them as being "marginally lower" in their first quarter of FY15. This could certainly impact their profit growth moving forward.
It's also very possible that stricter capital requirements could be implemented as a result of David Murray's Financial System Inquiry. This could impact the bank's return on equity while it could also harm the bank's ability to grow or even maintain its dividend in the medium-term. If that were to be the case, investors can expect a significant level of selling as the dividends have been one of the key attractions to the stock more recently.
Should you buy?
I have, for a long time, been bearish on each of Australia's big four banks. While each of them are high-quality corporations in their own rights, they are by no means cheap investment prospects – particularly with limited growth prospects in the coming years.
While there is a chance the bank's shares will rise again in 2015, there is also a very real prospect that they could fall in value substantially – particularly if cracks begin to appear in Australia's housing market which is considered to be inflated.
While the dividend still looks appealing, I would suggest investors avoid Commonwealth Bank and instead look elsewhere for fully franked yields with a particular focus on companies which also offer strong growth prospects.