Why the Commonwealth Bank of Australia share price is under fire today

The Commonwealth Bank of Australia (ASX: CBA) share price has come under fire today, slipping 2.4% to $74.80, although it did fall as low as $74.15 earlier. The shares have now lost 4.6% since the beginning of the week.

Indeed, today’s falls can most likely be attributed to an announcement made by Commonwealth Bank’s rival, Australia and New Zealand Banking Group (ASX: ANZ), earlier today.

The bank said that due to its exposure to “a small number” of Australian and multi-national resources businesses (as well as supporting industries, such as mining services), its bad debt charges are expected to increase by “at least $100 million.” That’s on top of the $800 million charge the bank anticipated when it released its first-quarter trading update on 17 February 2016.

According to The Sydney Morning Herald, ANZ’s exposure to Arrium Ltd (ASX: ARI) and Peabody Energy is believed to make up the bulk of that additional charge. Peabody is thought to be near bankruptcy while Arrium has also recently flagged its doubts as to whether it can continue as a going concern.

ANZ’s acting Chief Financial Officer, Graham Hodges, said: “While the overall credit environment remains broadly stable, we are continuing to see pockets of weakness associated with low commodity prices in the resources sector and in related industries.

This is largely due to the crashing commodity prices, particularly in iron ore, copper, coal and oil markets. Resources businesses rely on higher commodity prices to grow their earnings and, when they fall, switch their focus to cost cutting. That, in turn, impacts related industries such as mining services whereby the miners themselves tend to take their services in-house. Those with large piles of debt are then left in a very vulnerable position.

Unfortunately, the ANZ Bank isn’t the only bank exposed to such issues, and analysts believe this could be the beginning of a sector-wide trend. ANZ is thought to be one of the most exposed, followed by Commonwealth Bank (both with around $20 billion each in exposure, according to The SMH) and then Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd. (ASX: NAB).

Foolish Takeaway

Many Fools – myself included – have been somewhat bearish on the big four banks for some time now. Notably, I think Commonwealth Bank is a great business, and would happily add it to my own portfolio for the right price and at the right time in the business cycle.

Unfortunately, while falling bad debt charges have helped drive the bank’s earnings higher in recent years, that is a trend that looks set to reverse course in the coming years. There are a number of other headwinds that are also facing the banks which I believe could impact their performances in the coming years, which is why I’m still avoiding the banks even at today’s prices.

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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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