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5 reasons the Commonwealth Bank of Australia (ASX:CBA) share price could be a buy

Many share market investors will feel upset with the performance of their big bank shares over the past couple of years. Once thought of as strong and reliable dividend payers that offered a little bit of growth they commonly make up a large portion of many SMSF or private investors’ portfolios.

But let’s take a look at their performance over the past three years:

Westpac Banking Corp (ASX: WBC) down around 18% to $26.42 today

National Australia Bank Ltd (ASX: NAB) down around 13% to $24.91 today

Australia and New Zealand Banking Group (ASX: ANZ) down around 0.5% to $27.15 today

Even the best-performing big bank over the past 10 years the Commonwealth Bank of Australia (ASX: CBA) is down 10% to $72.43 over the period.

However, the share price falls and negative sentiment around the banks may be an opportunity, let’s take a look at a few reasons why.

  1. Be greedy when others are fearful and fearful when others are greedy” – is probably one of the most famous investing quotes attributed to Warren Buffett as the world’s most successful investor. A lot of fear or negative sentiment exists around CBA shares right now due to a number of factors including; the Royal Commission, the AML-CTF transaction reporting scandal, falling house prices, and the bank bill swap rate rigging scandal. All of these factors are keeping pressure on the share price over the short term.
  2. Strategy – CBA cannot be accused of sitting on its hands in response to the problems. In fact many market commentators or professional analysts have accused it of overreacting in selling its wealth management business, Colonial First State Global Asset Management, and mortgage broking businesses. As the new CEO notes this allows it to concentrate on its core banking businesses of lending services.
  3. Dividends – Even if CBA keeps its dividend flat for its fiscal year ending June 30, 2019 at $4.31 per share as some analysts are predicting the stock would still offer a yield of 5.9% plus 100% franking credits. It’s possible dividends fall a little but the yield is still likely to be strong for medium-term dividend seekers in what is a “reset” year for the bank.
  4. Competitive position – CBA remains the strongest of the big 4 banks that have a stranglehold on the mainstream banking industry in Australia. In particular these banks dominate the most profitable space of home loan lending and credit card services. CBA is also still widely regarded as the leader in terms of technology platforms and services.
  5. Costs – it has plenty of room to pull out costs if times get tougher. While cost cutting your way to profit is not a good long term strategy, over the short term it can be effective for shareholders. However, it should be noted that costs are likely to rise for a lot of banks as they implement reforms in response to the Royal Commission. This though is arguably priced into their cheap valuations.

Although it’s facing plenty of short term risks, over the long term CBA is still a strong business. It’s also possible we’re now close to the bottom of the housing downturn and the worst of the Royal Commission scares.

Motley Fool contributor Yulia Mosaleva owns shares of Commonwealth Bank of Australia. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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