The biggest constituent of the ASX Index is Commonwealth Bank of Australia (ASX: CBA), so it's bad news if it drops significantly.
According to analysts at Morgan Stanley and Citi, our biggest bank faces a significant fall if the Royal Commission comes out with judgements that are worse than most people are expecting.
Analysts like to consider a range of possibilities for each business and the most likely outcome determines what a reasonable share price would be. If the market has underestimated the possible consequences then the market could be in for a rude awakening.
The Commonwealth Bank share price has already fallen over 25% since its all-time high in 2015 due to a slowing housing market, additional capital requirements, sluggish mortgage growth and a contracting net interest margin (NIM).
However, Citi believe that the Commonwealth Bank share price could fall another 20% to $57.25 in a worst-case scenario. This is because it is more exposed to mortgage lending, along with Westpac Banking Corp (ASX: WBC), compared to Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).
Morgan Stanley has a $65 price target, but thinks the most likely outcome will only be somewhat negative and lead to a 4% share price fall to just under $69.
However, in general both brokers don't believe that Commonwealth Bank represents a good opportunity. Commonwealth Bank and its peers face structural and cyclical headwinds that could hamper growth for a number of years. The structural changes could be permanent.
Foolish takeaway
Commonwealth Bank is trading at under 13x FY19's estimated earnings with a grossed-up dividend yield of 8.7%. I wouldn't buy at today's price.
