What Happened to Commonwealth Bank of Australia’s Share Price?
Shares in Australia’s biggest bank, Commonwealth Bank of Australia [ASX:CBA], copped a belting today. The stock ended on the lows of the day, down 5.85% at $82.98, to record its cheapest closing price since mid-January. Today’s price action drags investors’ year-to-date gains on CBA down to roughly zero.
Why Did This Happen to CBA Shares?
In this morning’s trading update for the quarter ending 31 March 2015, CBA revealed that its profit for the period was unchanged from the same period the previous year. Higher regulatory and compliance costs blew the bank’s expenses out, and its revenue only grew 5% amid subdued conditions.
In home lending — CBA’s ‘bread and butter’ — the firm’s loan book is expanding more slowly than those of its peers. What’s more, the margin it earns on loans is under pressure. That might explain why CBA chose not to pass on all of yesterday’s 0.25% official interest rate cut to borrowers.
The silver lining is that CBA’s credit quality remains sound, with borrower default rates low.
All told, today’s result fell short of investors’ hopes and indicated that the broader environment for banks is getting tougher. That’s what sparked the biggest single-day selloff in CBA shares since the days of the global financial crisis — wiping around $8 billion from the stock’s value.
What Now for Commonwealth Bank of Australia?
With a market valuation of more than $130 billion, Commonwealth Bank remains by far Australia’s biggest listed company. Share investors still view CBA as a safe store for their savings. That fact, and its exposure to the Aussie property sector, make it attractive for investors seeking ‘safe’ stocks.
But being a ‘safe’ investment has its drawbacks. Today’s price action showed how little patience investors have for blue-chip stocks that don’t grow earnings. It shows that there are no guaranteed returns in the stock market.
All of the major banks have suffered a share price correction over the past month and a half. Right now, investors’ fears of a bubble in bank valuations seem to have risen to a crescendo. That means at some point in the near future, the banks should be ‘good buying’.
If you can add a perennial investor favourite to your portfolio at a bargain price, it should reward you handsomely over the long run. We may be drifting back to a level where CBA shares become too cheap to ignore.
Cheers, Tim Dohrmann
Editor, Money Morning