Commonwealth Bank of Australia (ASX: CBA) has produced a late recovery this afternoon, climbing back into the black after having fallen to a near five-month low earlier in the session.
After having plummeted 5.9% on Wednesday in what was one of its worst falls since the days of the Global Financial Crisis, the bank stock fell a further 2.4% to just $81 but is now trading 0.04% higher at $83.01. Unfortunately, that will come as little consolation for its shareholders given that it's still down 14% since it peaked at $96.69 in March.
That not only puts it in "technical correction" territory, but essentially all of the gains achieved over the last six months have also been wiped out.
Before you assume otherwise, this is not a buying opportunity.
It's possible that some investors see the recent pullback as a buying opportunity (hence this afternoon's recovery), but investors need to be aware that Commonwealth Bank's heavy falls have come as a result of a number of key issues.
First and foremost, the stock has become wildly overpriced and it seems that investors are only just beginning to realise it.
In light of the low interest rate environment, investors bid the stock price to unprecedented heights to gain exposure to its generous, fully franked dividend yield. They even justified the stock's premium based on the assumption that profit growth would continue well into the future.
This week, each of the Big Four banks have provided earnings updates, and the market has been left underwhelmed. Westpac Banking Corp (ASX: WBC) reported flat earnings and said it needed to raise capital – a move followed by National Australia Bank Ltd. (ASX: NAB) this morning; Australia and New Zealand Banking Group (ASX: ANZ) referred to difficult times ahead and Commonwealth Bank's net profit actually declined compared to the year-ago period.
Expenses are on the rise, net interest margins (a key measure of bank profitability) are contracting and declines in bed debt charges appear to be slowing. At the same time, dividend growth is narrowing and investors have been left uninspired by the Reserve Bank which indicated interest rates will not fall any further.
Commonwealth Bank, like its big rivals, has enjoyed a remarkable seven-year stretch since the lows of the GFC but it certainly appears its race could be nearing an end. With further falls possible – and even likely – investors would be wise to steer clear.
