Is the CBA share price a buy?

Is the Commonwealth Bank of Australia (ASX:CBA) share price a buy?

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Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy?

The Royal Commission report has been handed in and now the government and banks like National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have to decide what to do with the recommendations.

Commissioner Hayne was scathing of the whole industry, saying that it was failings of organisational culture, governance arrangements and remuneration systems that were at the heart of the misconduct examined in this Commission.

Before the release of the reported, we learned that ASIC had temporarily banned CBA Financial Planning from charging ongoing service fees until the conditions of the 'Enforceable Undertaking' (EU) have been met, including improving systems and taking steps to remediate customers. CBA estimated the impact of changes to be approximately $40 million.

Despite the above, Commissioner Hayne said in the report "I was persuaded that Mr Comyn, CEO of CBA, is well aware of the size and nature of the tasks that lie ahead of CBA." NAB's Chairman and CEO received a much worse assessment.

So, CBA is all in the clear?

Not quite. It is still going through the process of customer remediation which is going to cost hundreds of millions of dollars in refunds and legal fees after everything is said and done. That doesn't include any potential class actions which could drag on for many more months or years.

However, the Royal Commission Report did not recommend that the vertical integration model be completely banned, although CBA has already been selling assets in this regard.

The Royal Commission Report also didn't suggest that banks need to expand how they look at borrowers or prohibit the use of the HEM, the widely-discussed household expenditure measure.

In many ways, it wasn't anywhere near as bad for CBA as it could have been. The stricter lending practices that we have seen over the past year will likely remain with banks verifying prospective borrower spending habits, income sources and so on.

Is the CBA share price a buy?

I think CBA shares are worth a little more than they were worth during Monday's trading hours. I wouldn't be surprised to see the share price rise at the open.

CBA gave a brief market announcement to say that it notes the recommendations and will work with the various bodies to address the issues and investigations that are ongoing.

It remains to be seen how much of a hit to profitability the recommendations will be. Perhaps over the long-term the Royal Commission will help CBA become a more reliable, better bank. Mortgage brokers may lose some of their influence, adding to the market power (and profitability) of the major banks.

CBA currently offers a grossed-up dividend yield of 8.7%, which certainly appears attractive. In my opinion I wouldn't call CBA shares a buy at least until the house prices stop falling – two quarters of growth would be my definition of when they have stopped declining. Until then, CBA is staying off my watchlist.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

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