The share price of Commonwealth Bank of Australia (ASX: CBA) has been trending back up since it settled its case with the Australian Transaction Reports and Analysis Centre (AUSTRAC) for a $700 million fine, but the reprieve won't last if Morgan Stanley's prediction comes to pass.
The broker's bearish view on the stock has not prevented shares in our biggest mortgage lender rallying 0.8% to $69.75 this morning – outpacing the 0.6% gain on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
But Morgan Stanley believes the stock is about to fall relative to the market over the next 60 days and it rates the probability of this occurring at 60% to 70%.
The broker thinks consensus earnings forecasts for the bank are too high and that its fellow brokers will cut their estimates for the stock in the near-term.
"In our view, CBA is vulnerable to the operating headwinds and regulatory scrutiny facing Australia's major banks," said Morgan Stanley.
"While we view the recent AUSTRAC settlement as an incremental positive, we see downside to consensus earnings estimates in the near term and risk of a further de-rating."
You can credit the weakening housing loan market, near-term margin pressure, uncertainty on costs and the loss of earnings from the bank's recent sale of some of its businesses for the broker's downbeat assessment on the stock.
Further, the broker has highlighted cultural issues that were exposed at the Banking Royal Commission that gives rise to questions over the bank's conduct and the lower strategic clarity from management.
What's just as concerning is that Morgan Stanley believes Commonwealth Bank's FY20 earnings per share (EPS) will be lower than what the bank achieved in FY17. The slide in earnings will lower Commonwealth Bank's return on equity (ROE) to under 14% from around 15.5%.
Commonwealth Bank used to generate a stronger ROE than the other three big banks and is the reason why investors were willing to cough up a premium to buy its shares.
The drop in ROE means the market will likely be discounting the value of the stock (this is called a de-rating) instead.
Commonwealth Bank is not the only one facing challenging times even though it's the only big four bank that Morgan Stanley has highlighted to be vulnerable to a fall.
Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) are also impacted by similar headwinds, although their exposure to the residential market may not be quite as large as Commonwealth Bank.
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