CBA shares hit four-month low as investors flee

COMMONWEALTH Bank has suffered its biggest drop in share price since the GFC, and investors think the dream run for the big four could be over.

“We could see significantly lower bank prices before this is over.”

COMMONWEALTH Bank shares have dropped to a near four-month low, with analysts warning there could be worse to come and investors questioning whether the dream run is over for Australia’s big four lenders.

CBA shares slumped more than four per cent on Wednesday after the bank announced a flat $2.2 billion third quarterly cash profit result.

They are now trading around $84, which is about 13 per cent lower than their record high of $96.69 in March.

CMC Markets chief market strategist Michael McCarthy said investors were starting to question the growth prospects of CBA and its fellow major lenders, including National Australia Bank, Westpac and ANZ.

“The big question about where does growth in earnings come from has been made more difficult to answer by these results and that’s why we are seeing such a dramatic reaction,” he said.

The big four’s share prices have soared since the global financial crisis as investors piled into high quality companies. And in the past three years low interest rates have forced conservative investors to ditch term deposits for the bank’s reliable dividend yields.

But Mr McCarthy said CBA’s share price fall put that investment thesis into question and warned further falls were likely.

“As a lot of people are finding out, when a stock can drop 13 per cent, the dividend does not offset that loss,” he said.

“With the valuations so stretched the capital risks have now become so significant they could overwhelm the dividend yield argument and if that’s the case we could see significantly lower bank prices before this is over.”

CBA isn’t the only bank under pressure, Westpac shares are down six per cent since the after announcing a flat first half profit $3.78 billion on Monday.

ANZ has fared better, with its shares flat compared to the start of the week thanks to a better-than-expected five per cent rise in its profit to $3.67 billion, while NAB is down more than three per cent for the week, ahead of its profit result on Thursday.

The sell-off in bank shares has been exacerbated by a signal from the Reserve Bank of Australia that it may be done cutting interest rates.

The RBA cut its cash rate to a record low of two per cent on May but did not provide any outlook about possible future moves, which led economists and traders to conclude the bank’s three and a half year easing cycle may be over.

CBA attributed its flat profit result to tough competition for loans and higher costs.

It said competition among lenders had weighed on its group net interest margin, the profit it makes on loans, during the quarter. Meanwhile, expenses rose faster than in previous quarters due to higher regulatory costs and provisions linked to its advice review program.

Growth in the bank’s home loans division was also not as strong as its peers, with the Commonwealth saying it had less of a focus on the fast-growing property investor market.

Originally published as CBA shares hit four-month low as investors flee