Shares of Australia's largest bank, Commonwealth Bank of Australia (ASX: CBA), suffered a major setback late last week with the stock shedding more than $6 per share in the final two sessions.
The stock lost 3.2% on Thursday and another 3.8% on Friday for a total loss of 6.9% – heavily underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) in that time. Australia and New Zealand Banking Group (ASX: ANZ) was the only bank stock to record a heavier loss, falling 7.5% on Friday and for the week. The Big Four lost a combined $26.9 billion of shareholder value in that time.
Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB) shed 6.2% and 4.4% of their market value on Thursday and Friday, as well.
Source: Google Finance (August 5, 2015 – August 7, 2015)
So what's happening to Commonwealth Bank's share price?
Commonwealth Bank's setback was largely caused by the ANZ Bank's announcement of a $3 billion capital raising designed to help the bank meet the new capital requirements announced by the Australian Prudential Regulation Authority, or APRA.
Prior to ANZ's raising, Westpac and NAB had already raised new capital and it is now expected that Commonwealth Bank of Australia will follow suit when it reports its full-year earnings on Wednesday this week. It's likely that it will bolster its capital reserves by issuing new shares through its dividend reinvestment plan and possibly through a rights issue or placement.
Notably, the bank cannot afford to raise too little as it will reflect poorly on management if it has to tap the markets for more money in the near future, but it can't raise too much either or it will risk impacting its return on equity (ROE) too severely.
While some estimates put the amount that Commonwealth Bank will raise at just under $4 billion, others suggest it will need to raise $5 billion or more. This is especially important if Commonwealth Bank wants to regain its status as Australia's best capitalised big bank.
Furthermore, there were signs of weakness in ANZ's third-quarter earnings forecasts which does not bode well for Commonwealth Bank, including a lift in provisions for bad debts which, until now, have been a key driver of the sector's growth.
Although some analysts have expected bad debt charges to rise for some time now, ANZ's forecast highlights that the headwinds facing the sector may be stronger than the market had anticipated which would explain the major sell-off late last week.
Should you buy Commonwealth Bank shares?
With its shares now trading near a two-month low price, some investors will no doubt be looking at Commonwealth Bank with some interest – particularly with the stock now offering a forecast 5.2% fully franked dividend yield.
However, the recent volatility experienced by the sector highlights the strong headwinds facing the banks which could seriously hinder their ability to continue growing as strongly as they have in recent years. APRA's new capital requirements could also impact their ability to grow or even maintain their current dividend payments which could be extremely damaging to the banks' share prices.
Although it might be tempting to take a bite of Commonwealth Bank after last week's rout, investors would be wise to remain on the sidelines, for now.
