Why I’m holding off buying Commonwealth Bank (CBA:ASX) shares

The Commonwealth Bank of Australia (ASX: CBA) has been in the news for all of the wrong reasons. The royal commission into the banking sector combined with a $700 million fine for breaches of anti-money laundering laws has shareholders pondering the value of the company. 

CBA is Australia’s largest company with $121 billion in market capital and more than 800,000 shareholders. Since 2008, CBA has rewarded long-term shareholders handsomely with consistent dividends and significant capital growth.  

On current prices, CBA has a P/E ratio of 12.37 and a dividend yield of 6%. For a company that has grown earnings almost every year since 2008, this would normally have value investors excited. 

Additionally, CBA has pencilled in growth with EPS expected to increase by 4% while its dividend is projected to grow 8% by 2020. This means that if you were to buy CBA at today’s price, you would be locking in a P/E ratio of 12 and a dividend yield of 6.7%. 

Comparatively speaking, CBA shares appear to present some value. However, since last year the share price has fallen 17% and with recent media attention in mind, investors are understandably nervous that where there’s smoke, there’s flames.  

Both the findings of the royal commission and the anti-money laundering breaches suggest ethical and business management deficiencies. If this is systemic, CBA is an avoid in my opinion.

Adding to investors’ concerns is the extent to which CBA may be exposed to a potential housing market correction. Currently the largest home loan provider in Australia, CBA receives 68% of its revenue or $17.6 billion from net interest income. 

CBA has $435 billion in interest earning home loans which in conjunction with slow wage growth and increasing mortgage stress, places it in a precarious position should house prices fall dramatically. 

Word out of CBA is that the domestic mortgage market is a key focus area for the business and that it continues to maintain a high-quality portfolio.  

Simply speaking, the decision on whether to invest in CBA is hinged on your faith in management. If you trust them, current share price movements are an opportunity to top up at discounted prices. 

Foolish takeaway  

CBA is a fundamentally sound company with some issues to iron out. In my opinion, with the threats and unknowns of the domestic mortgage market and the recent scandals that CBA has been involved in, I’m happy to wait on the sidelines. 

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Motley Fool contributor Matt Breen 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 Scott Phillips.

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