The Commonwealth Bank of Australia (ASX: CBA) share price is up by 7% over the past month, is it a buy?
It has made a decent recovery, you don't often see that type of movement from a country's largest business in one month – although it was quite a turbulent month in October.
Many older investors think fondly of Commonwealth Bank – it has created enormous long-term wealth and continues to pay out a huge dividend. Indeed, it currently offers a grossed-up yield of 8.6%.
However, there is the potential for that yield to actually be a trap similar to Telstra Corporation Ltd (ASX: TLS).
Home lending only grew by an annualised 3.1% in the September 2018 quarter compared to the June 2018 quarter, which is barely faster than population growth.
After such a strong property market boom, the credit growth of banks is likely to be slow for at least the next few years.
Commonwealth Bank currently has cyclical low bad debts as a percentage of its total loan book. The loan impairment expense was only 0.11% of the group in the September 2018 trading update. This has been great for its profit in recent years.
Lowering interest rates makes it easier for consumers and businesses to afford their repayments. However, the interest rate is quite unlikely to go any lower.
One of the key stats I have my eye on with the banks is that consumer home loan arrears of more than 90 days are rising. For Commonwealth Bank, two years ago it was 0.53%, a year ago it was 0.59% and for September 2018 it was reported at 0.67%. Falling house prices could be a bad thing for these particular loans.
Foolish takeaway
Investing in big banks is taking a bet that the housing market will grow relatively well and that there won't be many defaults.
Whilst I don't think Australia is about to have a GFC, I don't think Commonwealth Bank will get back to its glory days any time soon either.
