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Why I think the Commonwealth Bank of Australia share price could underperform

Brendon Lau
CBA ATM machine

Shares in Commonwealth Bank of Australia (ASX: CBA) are leading Big Bank stocks lower this morning and I suspect that the share price of our largest home loan lender will continue to lag its peers for most of next year.

My worries are based on Commonwealth Bank’s response to the AUSTRAC claims, which showed that the relationship between the bank and the regulator have hit a new low, and that can’t be good news for shareholders.

Commonwealth Bank released an ASX announcement after the market closed last evening acknowledging that it failed to uphold and enforce money laundering measures in 53,560 cases, but said in the same breath that all of these cases stem from a single systems-related error.

Management is effectively saying it violated the law over 53,000 times but should only be punished for one crime. If it is successful in convincing the court, the bank will likely get only a slap on its wrist.

I doubt AUSTAC sees it that way and in a sign that the government regulator is frustrated with the negotiation process with the bank to reach a settlement on these breaches, it is filing additional charges against Commonwealth Bank.

Shares in Commonwealth Bank are trading 0.5% lower at $79.91 when Westpac Banking Corp (ASX: WBC) is flat, Australia and New Zealand Banking Group (ASX: ANZ) is 0.2% lower and National Australia Bank Ltd. (ASX: NAB) is 0.3% in the red.

Commonwealth Bank is also pleading innocence to some of the allegations.

“(We) agree that we did not adequately adhere to risk assessment requirements for Intelligent Deposit Machines (IDMs) – but do not accept that all this amounted to eight separate contraventions – and agree we did not adhere to all our transaction monitoring requirements in relation to certain affected accounts,” said the bank in the announcement.

Sounds like splitting hairs, but its lawyers probably see this as a viable defence in ensuring the bank gets away with as small a punishment as possible.

This could be a double-edged sword. A light punishment will only intensify public perception that banks are a law unto themselves even as the federal government caved in to holding a Royal Commission into the sector.

What is clear is that there won’t be any quick settlement and this issue will continue to be in the public spotlight well into 2018. This unwanted distraction cannot be good for Commonwealth Bank’s share price.

I have written before that the stock still has room to be de-rated by the market. This latest development only reinforces my worry that Commonwealth Bank’s share price performance will continue to lag its peers for some time yet.

It may not be a bad idea to be rotating capital into other bank stocks.

The good news is that there are still good buying opportunities in the market outside of the banks. The experts at the Motley Fool have uncovered three blue-chip high yielding stocks that are worth having a look at for 2018.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. 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 Bruce Jackson.