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3 reasons I’m avoiding Commonwealth Bank of Australia shares

The Commonwealth Bank of Australia (ASX: CBA) share price is too high for me to buy today.

3 reasons I’m avoiding CBA shares

Regulation

The Commonwealth Bank share price, along with that of rivals National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC), went into a nosedive earlier this week when the Government announced a Big Bank tax.

While I don’t think the 0.06% annual tax on liabilities is a problem for CBA shareholders in the short term – I think they’ll handball the tax to customers — I think it is just one example of the regulatory risks they face.

In addition to the tax, CBA and its peers are required to hold more safe capital, just in case, Australia experiences a financial system shock. However, holding more capital poses challenges for the bank to improve its profitability. Although I believe CBA is well-placed to deal with some of the increasing capital pressures, the regulatory burden is also weighing on investor sentiment.

Squeezing margins

CBA’s profit margins are under threat. The costs of funding, including the funding from international debt markets used to support loans made to customers, is rising. On the other side of the equation, competition is mounting and forcing banks to offer better interest rates on loans.

An increase in RBA interest rates would offer some relief for the banks, enabling them to widen their profit margins, but that appears some time off.

Cycle effects

Bank profits are cyclical. House prices are cyclical. Interest rates are cyclical. Economic growth is cyclical. Bad debt charges are cyclical. I cannot tell you exactly where we are in each of these cycles but my guess is that we are closer to the top of house prices and bank profits than the bottom, and closer to the low of interest rates and bad debt charges.

Together with a rich valuation of their shares, the cycle does not appear in favour of buying bank shares at this time, in my opinion.

Foolish Takeaway

The big banks are great businesses with hefty dividends and wide ownership by Australians both inside and outside of superannuation. Therefore, I doubt the Government of the day would let them fail. However, it’s important to remember that CBA shares fell 60% in 18 months during the GFC — so they are not immune to share price falls.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of National Australia Bank Limited. 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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