It's rare that you see one of Australia's biggest banks trading more than 5% lower on any given day, but that's exactly what's happened to Commonwealth Bank of Australia (ASX: CBA) today.
Investors slammed the stock after the bank provided the market with an update on its third-quarter earnings performance. With more than 6.1 million shares having changed hands by late in the session, the stock was trading 5.6% lower at a near four-month low of $83.20. It's now fallen almost 14% since it peaked in mid-March.
It appears that Commonwealth Bank's dream run – and indeed, that of each of the big banks – may have finally reached a turning point.
The bank recorded a net profit of $2.2 billion for the three-month period, which compares to the $2.3 billion net profit it reported in the same period last year. It said that expenses had risen during the quarter while its net interest margin remained under pressure as a result of intensifying competition amongst rival lenders.
Unfortunately, Commonwealth Bank wasn't the only bank to deliver a disappointing report this week. On Monday, Westpac Banking Corp (ASX: WBC) reported a flat profit compared to the year-ago period, while its interim dividend also came in below the market's expectations. To make matters even worse, Westpac said it would issue new shares under its Dividend Reinvestment Plan (at a 1.5% discount) to raise capital – a method which will dilute current investors' ownership of the business.
Australia and New Zealand Banking Group's (ASX: ANZ) report on Tuesday was more encouraging than either Commonwealth Bank's or Westpac's, but investors will have to wait and see what National Australia Bank Ltd. (ASX: NAB) and Macquarie Group Ltd (ASX: MQG) dish up when they report earnings on Thursday and Friday, respectively, to truly assess the situation.
Writing on the wall
As much as investors don't want to hear it, the writing has been on the wall for the banks for a long time.
While they have enjoyed the spotlight over the last three or so years thanks to their record-breaking profits and generous fully franked dividends, there was always going to come a time where their profits stalled and their dividend growth peaked. Whether that time has come or not remains to be seen, but the signs are certainly looking ominous.
The banks represent high-quality businesses, and ones that investors should certainly have on their watchlists. But the fact is, their shares are all trading at outlandish prices, pushed to the brink by the market's insatiable hunger for their fully franked dividends.
Although the banks have all fallen in price recently, as demonstrated on the chart above, investors would be wise to avoid the temptation to buy. Indeed, further falls are possible – and even likely – as the market continues to reassess their long-term outlook.
Of course, it also raises important questions regarding how the Australian sharemarket as a whole will be impacted.
