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Should you buy Commonwealth Bank of Australia at this share price?

Commonwealth Bank of Australia (ASX: CBA) shares are trading around the $79 mark and have lost almost 18% since March this year. By comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has lost a little under 13%.

Why the big fall?

Earlier in the year, investors appeared to be extremely confident in the country’s major banks. Commonwealth Bank, Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) all hit record highs while National Australia Bank Ltd. (ASX: NAB) traded at its highest price since the Global Financial Crisis.

Indeed, they had low interest rates as a tailwind resulting in booming house prices and strong loan growth, as well as record low bad debt charges which acted as a rocket behind their share prices.

Since then, a number of factors have impacted that view with all four falling into an official ‘bear market’ as a result. Loan impairment charges can’t stay this low forever and will inevitably change course, while competition amongst the majors will also continue to intensify applying pressure to the banks’ earnings potential.

Concerns have also been raised regarding the banks’ ability to continue growing their dividends, especially in light of the new tougher regulations that require them to hold more capital against the loans they write. Their returns on equity are bound to fall, suggesting the banks mightn’t be as attractive as they once were.

Should you buy?

Some investors have certainly taken advantage of the opportunity recently, snapping up shares of Commonwealth Bank. Indeed, they’ve rebounded almost 13% from their September trough and climbed 6% since Monday this week.

Although the bank’s shares are currently offering a 5.4% dividend yield; I still believe there are greater opportunities currently presenting themselves. There are strong headwinds facing the banking sector and, with limited growth potential, it doesn’t appear to be the best way for investors to take advantage of the heavy fall in the market recently.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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