The share price of Commonwealth Bank of Australia (ASX: CBA) is bouncing back as the rally in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) pushed almost every sector into the black in late afternoon trade. It has been a sobering few days for shareholders of Australia's largest mortgage lender as it is rocked by allegations that it has been complicit in money laundering.
The question is whether you should buy the bounce (after the stock's big 4.6% battering last week) with the Australian Transaction Reports and Analysis Centre (AUSTRAC) launching civil proceedings against the bank for failing to report thousands of suspicious transactions that may be linked to drug syndicates or even terrorism.
Just as importantly, one has to wonder if the premium commanded by the Commonwealth Bank over the other Big Banks is justified given that the historical premium would be a big factor in any decision you make about the attractiveness of Commonwealth Bank's stock.
From where I stand, I think Commonwealth Bank is about to underperform its peer group over the medium term because of this "premium" issue. Perhaps the right question to ask is not whether it should trade at a premium but whether it should trade at a discount!
It's a question that is almost unthinkable. Commonwealth Bank used to trade on higher multiples than the other three big banks because of its unusually high return on equity, which reflected its dominance in the lucrative residential mortgage market.
Australia's largest bank by market capitalisation also prided itself in being ahead of the technology curve and used IT as a productivity tool to drive better shareholder returns and outcomes for customers.
Commonwealth Bank's P/E premium to its peers has mostly been pared back already. At best, the stock is slightly ahead on this basis.
But I think Commonwealth Bank will not only lose its crown, but will end up holding the wooden spoon for the medium term and that means the stock is likely to underperform Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) for the rest of this year, if not a little longer.
Here are a few reasons behind my bearish view. Firstly, the IT edge Commonwealth Bank claimed to have may not exist (maybe it never really existed?) as the bank admits technology seems to have gotten it into trouble.
Its dominance of the mortgage market is also no longer as big a competitive edge as it used to be with risks in the domestic housing market starting to build rapidly. I would argue that some diversification at this point in the cycle is a positive and that is why the other big bank stocks are better placed.
Thirdly, Commonwealth Bank is still trading at the higher end of its P/E band. The stock has traded between 11.4 times and 16.9 times over the past five years, according to data from ycharts.com. It is currently trading close to 16 times and I think there's more room for it to fall before any real bargain hunters move in.
Lastly, and perhaps most importantly, buying Commonwealth Bank stock now would breach a rule I follow closely when it comes to picking up stocks that are under pressure. Don't get me wrong, I love bargains but I never buy a depressed stock if there are big questions over governance, management or its accounts.
These are just risk factors that are a "no-go" for me and I think the leadership of Commonwealth Bank has a lot to answer for before we can put this sorry saga behind us.
More happy days yet for short-sellers I reckon!
