What Happened to the Commonwealth Bank Share Price?
Shares of Commonwealth Bank of Australia [ASX:CBA] dropped 1% Friday, closing just below the all time record high the company reached the day before.
Why Did this Happen to the CBA Share Price?
With Commonwealth Bank trading close to a record high, investors rightly wonder if there is any more growth left in this $80-plus stock.
The stock is up 25% since reaching a low for the year of $64.49 in June 2013. The bank also pays a fully franked dividend yield of 4.7%. That’s the lowest yield out of the four major banks. Clearly due to the bank’s size and its market dominance it can command a premium among investors.
But even so, with the three other banks offering more favourable yields there’s certainly the chance that investors will look for opportunities elsewhere…especially if they’re worried about the bank’s prospects for growth.
What now for the Commonwealth Bank?
Three of the four major banks have reported their half-year results. The odd one out is Commonwealth Bank which has a reporting year-end of 30 June. Yet its recent quarterly report suggests that the bank could be on the way to recording a bumper $9 billion annual profit.
But is that sustainable? A big chunk of the bank’s earnings come from residential home loans. Yet the Reserve Bank of Australia (RBA) is doing its darnedest to talk down the prospects of further house price rises.
As RBA official Luci Ellis told a business meeting today:
‘It’s no surprise that as interest rates have fallen, it’s the trade-up buyers and investors whose demand has increased. Meanwhile first home buyers will feel squeezed out.
‘This is probably more a cyclical phenomenon than a structural one. It is still probably quite disheartening for potential first home buyers. As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings.’
In order for the banks to keep growing their earnings and dividends they need house prices to rise. In order for house prices to rise, there needs to be a sustained demand for housing. Australia’s banks have performed well over the past few years, avoiding many of the problems faced by overseas banks.
The next two years could see Aussie banks face their toughest test yet if house prices flatline or even fall.
Cheers,
Kris+
