Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy?
Commonwealth Bank shares are down over 12% during the past year, which sadly means shareholders' total returns over the past twelve months are negative even with the huge dividend.
Over the past 25 years Commonwealth Bank has been an excellent business to own with Australia's uninterrupted economic growth. But things aren't looking as rosy these days.
The Royal Commission has shone a spotlight on why the vertical integration model may not be in the best interests of the banks' clients. It was very profitable for CBA until it got slugged with legal costs and remediation for wrongdoing to clients. That's one of the reasons why the bank decided to offload CFSGAM for $4.1 billion. National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have also suffered in the Royal Commission.
If it hadn't been for CBA's one-off items, its continuing operations cash earnings per share (EPS) would have increased by 2.2%. It's arguable that some (or all) of the one-offs should actually be considered part of doing business, so don't be too quick to ignore those costs.
Whilst the CFSGAM sale helps CBA raise some cash to increase its CET1 ratio, it does reduce the number of avenues that CBA can make money from.
Investing in CBA shares these days is a bet on Australia's housing market. At the moment that doesn't seem like such a smart idea considering the key markets of Melbourne and Sydney are currently dropping at an annualised rate of more than 10%.
Commonwealth Bank is enjoying cyclically-low bad debts thanks to the record-low interest rates. However, banks are slowly raising rates and with house prices falling we may see bad debts rise again. That could put a dampener on profit growth for quite a while.
Even with Commonwealth Bank's grossed-up dividend yield of 8.5% I don't think we're being rewarded enough for the shorter-term downside risks at the moment.
With growing risks and limited growth prospects, I believe there are better ASX shares out there than CBA at the current share price.
