Should you buy Commonwealth Bank of Australia shares in 2016?

Compared to recent years, 2015 has been somewhat disappointing for most Commonwealth Bank of Australia (ASX: CBA) shareholders.

At the beginning of the year, there was much speculation that Commonwealth Bank’s share price would top the $100 mark and while it went close in March, climbing above $96, the shares soon collapsed into an official bear market. They hit a low around $70 a share in September and have since rebounded to $85.80, up less than 1% since the beginning of the year.

Source: Google Finance; one-year CBA share price chart

Source: Google Finance; one-year CBA share price chart

Of course, there have been plenty of blue chip shares that have delivered worse performances this year – BHP Billiton Limited (ASX: BHP), Woolworths Limited (ASX: WOW) and Australia and New Zealand Banking Group (ASX: ANZ) are just a few names that come to mind. But Commonwealth Bank shareholders will likely still be disappointed, and wondering whether greener pastures await them in 2016.

Indeed, Commonwealth Bank of Australia has long been regarded as one of Australia’s best shares – and for good reason. It has consistently grown earnings and dividends and generated enormous returns for investors since it listed its shares on the ASX in the early 1990s.

But in that time, it has also enjoyed more than two decades without an Australian recession, booming house prices and rising household incomes. More recently, it has also thrived from a low interest rate environment which has led to loan growth and record-low bad debt charges which have helped the Big Four banks to record-breaking earnings results.

As a result of this however, competition amongst the major banks for new customers has intensified. Not only has this impacted net profit margins (that is, the profits the banks make on their loans), it has also attracted the attention of the Australian Prudential Regulation Authority, or APRA, which recently asked them to boost their balance sheets with more capital.

These tougher restrictions will likely hinder the banks’ ability to keep growing earnings, while it could also impact their returns on equity and even their dividends. Worse yet, some experts believe they will need to raise even more capital over the next few years.

These are all valid concerns for bank shareholders, and are just some of the likely reasons why the shares came under such pressure in 2015.

Should you buy?

Commonwealth Bank of Australia is a high-quality business, and one that arguably deserves to be in any portfolio – but only for the right price. Although the shares are still trading at a discount to their peak price from earlier this year, I believe they are still overpriced considering the risks facing the industry. As such, I’ll be focusing my attention elsewhere in 2016.

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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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