Commonwealth Bank of Australia (ASX: CBA) has enjoyed incredible success in recent years. So have all of Australia's major banks, which have generated enormous wealth for investors since the depths of the Global Financial Crisis thanks to record low interest rates, diminishing bad debt charges, strong loan growth and a booming property market.
According to the latest banking statistics, released by the Australian Prudential Regulation Authority (APRA) on Tuesday last week, Commonwealth Bank controlled 26.8 per cent of Australia's mortgage market in August 2015. The second highest was Westpac Banking Corp (ASX: WBC) with a 24.8 per cent share, while the Big Four banks combined accounted for just over 83 per cent of the local home loan market.
With that kind of exposure, it's easy to see why the majors benefited so greatly from the housing boom.
Mining boom goes bust
But outside of Sydney and Melbourne, conditions aren't so strong and this could be where Commonwealth Bank comes undone.
Back in 2008 when Commonwealth Bank acquired BankWest, Fairfax quoted then CEO Ralph Norris as saying: "BankWest provides us with a significant opportunity to further enhance the group's business in the fast-growing Western Australia market."
Of course, that was in the midst of a resources boom where demand was skyrocketing for property near mining locations.
Fast forward to 2015 and it's a completely different story. Recent residential data cited by real estate advertising group Domain shows that investor loans in Western Australia fell 12.7 per cent during July, while the value of lending to WA investors was down 3.5 per cent during the first seven months of 2015. That makes it the only state in Australia to record a fall in investor activity during the year.
The miners are now handing out redundancies by the thousands, while houses in some locations are going for a fraction of the price they were purchased for just a few years ago.
As it stands, China is in the process of rebalancing away from manufacturing towards a services-driven economy. That means demand growth for commodities such as iron ore, coal and oil will likely decline further – perhaps sharply – putting the miners under even more pressure than they're currently under. To recoup those losses, there would be an increased need for cost improvements at mining sites and the possibility of more redundancies.
To be clear, booming house prices in Sydney and Melbourne also pose as a danger to Commonwealth Bank, and its big-bank brethren. Homeowners – particularly those with many investment properties to their name – are leveraged to their eyeballs so a potential pullback in house prices could lead to a deterioration in the banks' residential mortgage portfolio quality.
This is something that APRA itself is acutely aware of, and even prompted the regulatory watchdog to increase the capital requirements of Australia's five biggest banks. That includes Commonwealth Bank, Westpac, Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB), as well as Macquarie Group Ltd (ASX: MQG). These banks are now required to maintain an average risk weighting of "at least 25 per cent", up from 16 per cent previously.
Foolish takeaway
There's no denying how great the Big Four banks have been for investors over the last five or so years. All four represent great businesses that could, and perhaps should be bought, but only when the price is right.
All four have come under intense selling pressure most recently, and that has certainly sparked an interest among some investors that now could be the time to buy their shares.
My advice for those investors would be to assess whether you truly believe the favourable conditions enjoyed by the banks are as strong now as they were, say, 12 months ago, and whether the Big Four banks are truly the best place for your money today. Considering the market's heavy fall recently, and some of the reasonable prices on offer, there may be even safer places for your wealth right now.
