Why the Commonwealth Bank of Australia share price is crumbling today

Shares of Commonwealth Bank of Australia (ASX: CBA) have continued their descent today, falling from above $85 at the beginning of the year to just $77.93. They’re down 1.9% today alone and nearly 9% over the last week.

So What: Commonwealth Bank’s shares have been unable to avoid the carnage hitting the local share market, which has been spurred by crashing oil prices and extreme uncertainty surrounding the strength of the Chinese economy.

With Chinese stocks also plummeting in value, it is feared that this damage could spread to the Australian economy. Firstly, some investors would argue that the damage could impact our property market through what is known as the “wealth effect“. Commonwealth Bank is heavily exposed to Australia’s property market so a downturn in that market would clearly come as bad news to the bank and its shareholders.

The recent devaluation of the Chinese yuan could also hinder the rates of tourism from China to Australia, thus putting a lull on our services sector. That could further impact Australia’s rate of growth with a number of economists already throwing the ‘recession’ word around.

Speculation over a potential market downturn has also had an impact on Commonwealth Bank’s rivals, being Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC), all of which have fallen sharply since the beginning of the year.

Australia has managed to avoid a recession for more than two decades which has helped spur some truly remarkable growth from our banks, but they could be hit hard when (whether or not it happens in the near future, it will happen eventually) Australia experiences such an event.

Now What: Although some investors would argue that the banks now represent excellent buying opportunities, it is important to remember that they are vulnerable to a downturn in the local economy. In addition, they’re also facing strong regulatory headwinds which could impact their shareholder returns and dilute shareholder ownership further.

At their current prices, I would argue the banks are still too pricey when these risks are taken into account, and investors would be better off focusing their attention elsewhere.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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