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Is the Commonwealth Bank of Australia share price a buy?

The Commonwealth Bank of Australia (ASX: CBA) share price has grown by 7.66% over the last three months. That’s not a bad return for the biggest business on the ASX.

One of the main things why Commonwealth Bank seems like such a reliable investment is that despite scandals relating to various parts of its business, the bank has managed to churn out profit growth each year.

In-fact, in its trading update for the first quarter of FY18 it revealed that its unaudited cash earnings was up 6% compared to the prior corresponding period.

The bank has been hard to work strengthening its position by increasing interest rates on interest-only borrowers, which helps profitability and also better reflects the risk of lending.

At 30 September 2017 the deposit funding stood at 68% of total funding, compared to 66% at 30 September 2016. This is a safer source of funding for the bank.

Its liquidity coverage ratio increased to 131% from 129% at June 2017. This ratio is calculated as total liquid assets divided by total net cash outflows.

The CET1 (APRA) ratio stood at 10.1% at 30 September 2017, which was an increase of 55 basis points compared to June 2017 after allowing for the final dividend of 2017.

That’s a lot of financial talk, basically the bank is in a stronger position than it was three months ago and a year ago.

The property market is definitely slowing, there’s no doubt about that. Credit growth is slowing, not many people an afford to get a loan these days.

However, the two key signs of danger that I’m keeping an eye on is unemployment and customer arrears for Commonwealth Bank. As long as borrowers keep making repayments then the bank will have no trouble continuing to pay its legendary dividend.

Unemployment and customer arrears are at their lowest since the GFC, but it’s the next two years that will be key.

Foolish takeaway

Commonwealth Bank is currently trading with a trailing grossed-up dividend yield of 7.46%. I don’t think it’s a buy at the current price. Australia is more likely to have a dip than boom times over the next two years and the share price of $82 doesn’t leave much room for error.

Instead, I'd rather buy shares of these top blue chips over Commonwealth Bank.

Top 3 ASX Blue Chips To Buy In 2018

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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