The Commonwealth Bank of Australia (ASX: CBA) share price has fallen by over 10% during the past year, despite the strong recovery over the past two weeks.
When I first started looking at shares years ago I was interested in Commonwealth Bank. It seemed to be the highest quality bank with a large scale network of branches, the best banking app and a variety of additional services like its share trading business CommSec.
The bank recently announced that it would be divesting its asset management business Colonial First State, its financial advice business and the mortgage broker Aussie Home Loans. This seems to essentially be all the troublesome segments which have been brought up in the Royal Commission.
It's also looking to sell CommInsure General Insurance. The network of branches now seems to be a hindrance to profit with most transactions being done online.
Without all these different segments Commonwealth Bank will be a much simpler proposition for investors. Its main profit source will be loan lending to individuals and businesses.
However, it will lose several areas of future growth. The superannuation pool of assets is predicted to get bigger and bigger as the years go by. It seems the big banks have really mismanaged the opportunity to sustainably profit from this. If they'd stuck to offering a good service at a good price then they could have made a lot of money in the future.
All the banks are under pressure by regulators to be safer and have higher capital reserves in-case of a recession. Commonwealth Bank is improving its CET1 ratio, but this logically means that the bank will be less profitable than before. It's almost impossible for a bank to be safer and more profitable at the same time. The only way is for the net interest margin (NIM) to be higher, which the bank is finding hard to increase due to competition.
The recent fine from AUSTRAC has shown that big banks are particularly at risk of regulator oversight due to their size and importance to the economy.
Foolish takeaway
Despite everything that's happened, Commonwealth Bank is still a very profitable business and it's only trading at 13x FY19's estimated earnings with a trailing grossed-up dividend yield of 8.4%.
Is Commonwealth Bank a buy? As someone who is somewhat negative about the near future of the housing market I don't think it is a good opportunity. Indeed, due to its market cap size I don't think Commonwealth Bank is suitable for anyone under the age of at least 65 because it's unlikely to generate strong profit growth for a long time.
