Could the Commonwealth Bank of Australia share price fall below $64?

The Commonwealth Bank of Australia (ASX: CBA) share price is currently around $77.81, but could fall more than 18% to below $64 according to one commentator.

Thanks to a range of factors, including higher bad debt charges – which are at record lows, higher capital requirements and lower returns on equity, Australian Financial Review (AFR) commentator Chris Joye thinks the big four banks Australia and New Zealand Banking Group (ASX: ANZ), CBA, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) will see their share prices tumble.

Price to book ratios are one valuation method used to valued financial companies like banks, and Mr Joye thinks the banks will see their share prices fall to between 1 and 2 times book value. Under that scenario, CBA has the furthest to fall, with its current 2.4 times book value according to data from CapitalIQ.

ANZ, Westpac and NAB are already in that range with P/B ratios of 1.3x, 1.9x and 1.3x respectively, but could still see more falls. At 2x book value, CBA shares are worth $64, At 1x book, $32.

CBA also has the highest return on equity at 17.8%, while ANZ, Westpac and NAB are on 14%, 15.6% and 12.3% respectively. Mr Joye expects the big four banks’ returns to converge with their cost of equity at around 11% – again with CBA the biggest loser.

The majors have already managed to raise $33 billion in new equity over the past 12 months, but analysts expect they will need to find another $10 to $30 billion in equity in coming years.

It might be hard to envisage CBA’s share price falling under $64, but if the bank is forced to raise more capital, issuing new shares is likely to be its main source. And investors might also want to consider that CBA’s share price hit $96.17 in March this year before the bank issued 86 million new shares from a capital raising and dividend reinvestment plans.

The share price has since shed 18% – which at the time was probably unthinkable – another 18% fall from here is not that unrealistic.

Foolish takeaway

There’s no doubt (in my mind anyway) that the risks for investors in the big four banks is to the downside, with regional banks and smaller non-bank lenders likely to benefit the most.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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