Commonwealth Bank of Australia (ASX: CBA) has been one of the stocks leading the broader sharemarket's decline today, falling 1.3% compared to the S&P/ASX 200's (Index: ^AXJO) (ASX: XJO) 1.2% fall.
The bank's shares are now changing hands for less than $87 a unit after hitting a two-month high of $88.88 during yesterday's session.
Despite its pullback today – and the fact that it remains more than 10% shy of its all-time high of $96.69 recorded in March this year – there are a number of reasons why you should limit your exposure to the bank as well as its three primary rivals.
Firstly, Australia's major banks have benefited handsomely from the low interest rate environment that has been in place since the depths of the global financial crisis. Low bad debt charges, strong growth in loans written and a booming property market have seen their profits rise to record levels – a trend that is set to continue when they all report earnings this year.
Unfortunately, now is the wrong time of the cycle for you to consider buying the shares. Bad debt charges are already sitting at record low levels while competition is also heating up, impacting all of the banks' net interest margins (that is the profit they make on loans written).
Secondly, the Australian Prudential Regulation Authority, or APRA, passed down stricter capital requirements to the Big Four banks and Macquarie Group Ltd (ASX: MQG). That means that all five may need to raise more capital to satisfy APRA's demands which will likely hinder their returns on equity in the near future.
Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have already indicated they will need to allocate an additional $3 billion and $2.3 billion in capital respectively, while Commonwealth Bank and National Australia Bank Ltd. (ASX: NAB) will likely need to allocate more than $3 billion each. These costs will likely be passed down to customers and shareholders.
That brings me to the third reason investors should avoid Commonwealth Bank. Investors have long been attracted to Commonwealth Bank for its fat, fully franked dividend yield which currently stands at roughly 4.8%. While some investors believe it can continue to grow its distributions over the coming years, APRA's new standards could seriously impact its ability to grow, or even maintain them in the near-term.
With strong headwinds facing the entire industry – and the Australian economy as a whole – the solid dividend is about all that Commonwealth Bank has going for it at its current lofty valuation so if that comes under threat, you can expect the shares to retreat considerably.
