The Commonwealth Bank of Australia (ASX: CBA) share price is up 12% in a year, is it a buy?
Commonwealth Bank is Australia's largest business and has been one of the most reliable over the past decade.
Commonwealth's success is somewhat cyclical being a bank, but it could still be a long-term buy from today's price. Here is my bull and bear case for the Commonwealth Bank share price over the next few years:
Bull case
The long-term success of Commonwealth Bank is linked to Australia's economy, population growth and the number of properties in Australia.
The government is predicting that the Australian economy will keep growing over the next few years and the population will keep growing too. These are two positive factors for Commonwealth Bank's earnings.
All of the banks have implemented out-of-cycle interest rate rises in their loans which should increase the net interest margin (NIM), which is a key driver of profit. Increasing the NIM on the same amount of loans can only be a good thing for Commonwealth Bank.
The business is one of the safest and most diverse banks. It generates significant earnings from its financial planning business, Commsec, Comminsure and so on. This gives the bank good diversified earnings.
Bear case
There have been a variety of reports, studies and surveys released recently which say that households are feeling the pressure in their budgets. The latest from ME Bank doesn't paint a good picture for Australia if interest rates keep rising.
Loan holders would hopefully do everything they can to keep paying their mortgage above everything else but that's no guarantee that defaults won't increase if people can't keep up with payments.
Australia is one of the most indebted populations in the world and rising rates aren't going to be a positive for a lot of people. This could affect Commonwealth Bank directly and indirectly through the economy quite substantially.
There is a growing list of competitors who want to take market share. Online-only lenders, peer to peer lenders and overseas competitors are all chipping away at the market share.
Foolish takeaway
Commonwealth Bank is currently trading at 15x FY18's estimated earnings. Bank earnings can change rapidly if the Australian economy were to fall, so I wouldn't completely rely on the earnings number to eventuate.
The trailing grossed-up dividend yield is 7.11%. For investors just looking for big income from a blue chip then Commonwealth Bank isn't a bad option. But I'm not a buyer at today's price, I'm waiting until the next recession for a beaten-down price.
