With interest rates at record lows, it would have been fair to assume that the most popular high-dividend yielding stocks like the big four banks would be trading at all-time highs.
Unfortunately for many investors, this isn't the case and the share prices of all four banks sit comfortably below their all-time highs.
Commonwealth Bank of Australia (ASX: CBA) shares for example, are currently trading more than 21% below their all-time high of $96.69, reached in March 2015.
The interesting point to note here is since the shares hit their all-time highs, the RBA has cut interest rates on two occasions to 1.75%. Logic would suggest that CBA's share price should be far higher today considering the desire for income and dividends has only increased since then.
So what is holding the share price back?
I think there are a number of reasons that are contributing to the relative weakness investors are witnessing including:
- Concerns regarding further capital raisings – Although CBA and the other banks raised billions in new capital last year, several analysts believe it is only a matter of time before they have to go back to shareholders and raise fresh capital to meet more stringent regulatory capital requirements. The banks will not only have to comply with new Basel reforms, but also new requirements from the Australian Prudential Regulation Authority (APRA) aimed at ensuring banks can withstand shocks even bigger than the those that occurred during the GFC.
- Rising exposure to bad debts – CBA's third quarter update revealed a significant jump in bad debts to $427 million – a 67% increase over the prior corresponding period. Most of this was attributed to fallen steelmaker Arrium, along with a number of other corporate loans. Although the absolute level of bad debts for CBA is small, it is the recent trend that would be more concerning to investors. As the two charts below demonstrate, impairments look as though they make have bottomed in FY15 and could be one their way up again.
Source: Company Presentation - Exposure to residential property markets in mining states – The mining downturn is likely to have a large impact on the property markets in both Western Australia and Queensland. Although CBA's portfolio home loan arrears currently remain relatively low, there is some concern that the worst is yet to come for these property markets and that all of the major banks could be faced with serious impairment charges in the future.
- Net interest margins are falling – Low-interest rates are not only bad for savers, they are also bad for banks as they generally result in falling net interest margins. This has been seen widely overseas, where interest rates are much lower, and is already showing in CBA's results, as highlighted below.
Source: Company Presentation Higher levels of competition and higher funding costs are also making it harder for CBA to raise its margins and increase profitability.
- Negative media coverage – The major banks are no strangers when it comes to negative media but the threat of a Royal Commission, claims of fraud and allegations of corruption are all combining to paint a pretty damaging picture of the culture within the banking system. Politicians are becoming increasingly more vocal as well and this will no doubt have some investors concerned.
- Dividend growth has stopped – As the chart below highlights, dividend growth has come to a standstill over the last 12 months mainly as a result of slowing earnings growth.
Source: Company Presentation Importantly for investors, the dividend is not forecast to increase significantly over the coming 12 months and this may continue to have a dampening effect on the share price.
Foolish takeaway
CBA faces a number of headwinds at the moment and these are combining to have a significantly negative impact on the share price. Whether or not its 5.6% dividend yield is enough to offset its slowing earning growth is arguable but I wouldn't expect to see the shares reach $90+ per share anytime soon.
