The share prices of 3 stalwarts of the S&P/ASX 200 Index (ASX: XJO) have collectively fallen this morning in early trade.
At the time of writing, the Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) share prices have retreated by close to 2% to $71.88 and $17.32, respectively. The AMP Limited (ASX: AMP) share price has been the hardest hit of the 3 financial institutions, falling by as much as 12% to lows of $1.475.
What’s dragging these ASX blue-chips lower?
Class action woes
This morning, the ABC revealed that hundreds of thousands of Australians who were forced to pay ‘excessive insurance premiums’ may have a basis for pursuing compensation claims against the financial companies, as part of 3 separate class actions.
Although court claims against Commonwealth Bank and Westpac’s superannuation arm, BT Group, are expected to be commenced early next week, AMP has already been informed of claims filed against it this week in the Federal Court.
The practice leader for Shine Lawyers, the firm leading the litigation against Commonwealth Bank, AMP and Westpac, said the companies’ “business models were set up to promote their own products and their own interests ahead of those of their own clients and their members.”
The court actions mainly relate to life insurance and income protection policies offered by the 3 institutions.
It is anticipated that the 3 court actions are expected to be some of the largest since the Banking Royal Commission, and that is going to hurt all 3 companies if they are found to be liable for the alleged breaches.
The expected payout if wrongdoing is proven could be in the tens of millions, and that’s a significant headwind sending the share prices of all 3 lower.
AMP has also been hit hard due to its announcement to the market this morning pertaining to profit guidance for the first half of FY20. As reported by my Foolish colleague here, the struggling financial institution expects underlying profit to be in the range of $140–$150 million. Judging by the dramatic fall in the AMP share price this morning, the market believes this result is an underperformance.
Is this a buying opportunity?
Some would argue that this morning’s news provides investors with the ability to buy discounted shares in CommBank, Westpac and AMP.
Commonwealth Bank will announce its full-year results and provide an update on its dividend on 12 August, so many investors may take today’s opportunity to buy in and take advantage of its excellent dividend record moving forward. Westpac and CommBank (and until relatively recently, AMP) shares have historically paid out sizeable yields on a fully-franked basis to their shareholders, making these financial institutions a reliable income source for many Australian investors.
On the other hand, this litigation may lead to further negative price movements for these 3 ASX shares in the coming days and weeks, as others may sell out and take profits from the recent resurgence of financial stocks.
The three companies are such large institutions that their share prices will eventually make a comeback, so in my opinion the majority of shareholders will likely take today’s news as a short-term headwind.
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Motley Fool contributor Toby Thomas owns shares of Commonwealth Bank of Australia. 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 Scott Phillips.
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