Warning: This broker just downgraded Commonwealth Bank of Australia (ASX:CBA) shares

Is the Commonwealth Bank of Australia (ASX:CBA) share price cheap or a value trap?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

There's currently an awful lot of debate among market commentators, professional investors and ordinary mum and dad investors about whether shares in the big banks are "buys" after their steep price falls over the past couple of years.

It's a big issue as many SMSF or private investors will often have big bank shares as some of their biggest holdings.

Let's take a look at how the shares have performed since October 2014, excluding the beneficial effects of dividends:

The Westpac Banking Corp (ASX: WBC) share price is down 18% from $32.91 to $26.25

The National Australia Bank Ltd (ASX: NAB) share price is down 22% from $31.49 to $24.61

The Australia & New Zealand Banking Group (ASX: ANZ) share price is down 15% from $31.64 to $26.72

The Commonwealth Bank of Australia (ASX: CBA) share price is down 6% from $76.33 to $71.55

According to the News Corp (ASX: NWS) press Bell Potter has just downgraded CBA shares to a "hold" rating and $76 share price target, which reflects the rising risks in the bank space. These include falling house prices in Sydney and Melbourne, The Royal Commission, the bank levy, an upcoming federal election, and rising wholesale funding costs as benchmark lending and debt rates in the US rise.

Bell Potter argues that the negativity is now priced into bank shares, and also rates Westpac shares as a buy, although the constant revision of analyst price targets should be taken with a pinch of salt.

For example in October 2014 Bell Potter had a "buy" rating and $83 share price target on CBA shares partly based on an incorrect assumption the RBA would lift cash rates.

The more an investor trades the higher fees they rack up and trying to time the market can often lead to buy high, sell low results.

For example selling CBA shares now may be a mistake if Australian house prices recover in 2019, while its trailing 6% yield plus full franking credits will be difficult for dividend investors to beat elsewhere.

Trading at 12.2x trailing earnings CBA shares are also cheap on a historic basis, which suggests that many of the risks are priced into the shares.

Of course no one knows the future, so whether or not you own blue-chip dividend shares like CBA probably depends as much on your investment needs as anything else. For example if income and liquidity are your main objectives they are worth considering, however, they're not likely to offer much growth in the years ahead.

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.

More on Share Market News

Woman in celebratory fist move looking at phone
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A young man pointing up looking amazed, indicating a surging share price movement for an ASX company
Broker Notes

These ASX 200 shares could rise 20% to almost 30%

Analysts are tipping these shares to deliver big returns over the next 12 months.

Read more »

A young woman carefully adds a rock to the top of a pile of balanced river rocks.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

Energy and utilities stocks led the way last week with 4%-plus gains.

Read more »

Animation of a man measuring a percentage sign, symbolising rising interest rates.
Share Market News

Here's when Westpac says the RBA will now cut interest rates

Will borrowers need to wait until the middle of next year for relief? Let's find out.

Read more »

Boys making faces and flexing.
Opinions

3 ASX 300 shares to buy and hold for the long run

I believe these stocks have loads of growth potential.

Read more »

Young girl drinking milk showing off muscles.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a great end to the trading week for ASX investors today.

Read more »

Hands reaching high for a trophy with a sunset in the background.
Record Highs

The ASX 200 Index is on its way to another all-time high today. Here's why

These blue chip stocks are driving the index towards a new record today...

Read more »

Group of friends trading stocks on their phones. symbolising the 3 most traded ASX 200 shares today
Share Market News

3 ASX mining stocks topping the most-traded list in October

Chinese stimulus news and company announcements likely contributed to the higher trading activity.

Read more »