Shares of Commonwealth Bank of Australia (ASX: CBA) have climbed above the $88 mark for the first time since May, having spent much of the last two months fluctuating between $79 and $85 per unit.
Like Australia's other major banks, Commonwealth Bank endured a heavy selloff between March and June. Commonwealth Bank itself fell in excess of 18% with Westpac Banking Corp (ASX: WBC) the only bank to experience a steeper drop.
However, the sector now appears to be well and truly back in the market's favour with the 'Big Four' banks leading its latest recovery.
Given its recent strength, investors might wonder whether it's time for them to revisit Australia's largest bank. After all, the stock remains almost 9% below its all-time high price of $96.69 from earlier this year, with some investors hopeful it can go on to crack the $100 per share mark.
In truth, such a scenario is possible – especially if the Reserve Bank of Australia goes on to cut interest rates further in the coming months. Expectations are rising that it will be forced to – especially with consumer confidence declining – which would make Commonwealth Bank's fully franked dividend more appealing.
However, there are a number of headwinds facing the industry which could hinder shareholder returns. To begin with, the declining bad debt charges that have bolstered the banks' earnings in recent years will reverse course at some point, which will act as a drag on overall profits.
At the same time, competition within the sector for new customers is intensifying; the financial regulators are growing increasingly concerned about the state of Australia's property market and lending standards; while the banks are also likely going to have to raise billions of dollars in capital as a safeguard against an economic crisis. That will further impact their ability to grow, or even maintain, return on equity and overall investor returns.
Should you buy?
As I mentioned previously, there is every chance that the market could continue to push Commonwealth Bank (and each of its rivals) higher in the near-term, but there is absolutely no point in speculating what the market might, or mightn't do, in the short-term.
The fact is, Commonwealth Bank looks overly expensive at its current price and, in my opinion, will seriously struggle to generate market-beating returns in the long-run. As such, investors should continue to avoid the lure of the bank and look for other compelling investments instead. Indeed, there are plenty of them right now thanks to the market's heavy fall recently.
