The Commonwealth Bank of Australia (ASX: CBA) share price dropped by 24.5% during March 2020. Does that mean it's now a buy?
Indeed, since the falls started after 21 February 2020, the CBA share price has declined by 30%. It's very rare for a bank share price to fall so heavily in such a short amount of time.
But it's not surprising that investors have sold off CBA so much. There is a lot of coronavirus pain out there in the economy right now, not to mention all of the human suffering.
The thing is, when a black swan events happen it's businesses like banks that can suffer from extraordinary amounts of bad debts. A business that has very large assets and liabilities is more risky than a business that has no debt and a decent cash balance.
CBA has fallen less than some of its big bank peers like National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ). But I don't think it means it's a better buy now.
The banking system was already facing lower profits with the Reserve Bank of Australia (RBA) reducing the official interest rate to just 0.25%. The lower the interest rate, the lower CBA's net interest margin (NIM) is likely going to be.
Borrowers in financial difficulty are being encouraged to ask their bank for a payment holiday. That's less profits for the banks.
Many businesses and individuals have seen their income hurt. It's good that the government is providing huge, widespread support for a large number of businesses and individuals. But even the wage subsidy may not be enough to stop the economy going through a recession.
It's going to be a testing time for the banking system over the next six months. Whilst a 30% fall is painful, I'm not sure the decline fully reflects the possibility of a very difficult period.
Foolish takeaway
I think CBA would have to have fallen by over 45% before I'd be interested in buying it. The trailing CBA grossed-up dividend yield is almost 10%. But I wouldn't expect the payment to be the same over the next 12 months. There's a small chance the next dividend could be suspended entirely, depending on how bad things get.
Instead of CBA, I'd much rather invest in one of these top dividend shares for my portfolio for income.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.
