The CBA share price has sunk a brutal 10% so far this week. What gives?

Investors appear to be discounting the stock amid pending risks in Australia’s housing and mortgage segment.

| More on:
A couple sits on a sofa, each clutching their heads in horror and disbelief, while looking at a laptop screen.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • CBA shares extended losses in Thursday's session
  • Investors look to be pricing in the risks to Australia's mortgage and housing market, seeing as banks like CBA are heavily tied to the segment
  • In the last 12 months, the CBA share price has fallen more than 6% into the red

The Commonwealth Bank of Australia (ASX: CBA) share price lunged further south today, ending the day 2.59% in the red at $94.95.

Today’s fall brings the bank’s losses this week to almost 10%, as investors seek to price in troubling headlines on Australia’s mortgage market.

Here we take a look at what’s happening.

What’s clamping the CBA share price?

The flavours of surging inflation and rising interest rates make for an ill-tasting economic dish the market looks set to endure next few periods.

Consequently, the current chatter around ASX banks is centred around these factors.

Credit and ratings agency Moody’s Investors Service reckons there are impeding risks on the horizon for Australia’s mortgage market.

A rise in interest rates is generally accepted as a net positive for banks, seeing as it increases net interest income (NII) and widens net interest margins (NIMs), two important factors of income on a bank’s P&L statement.

However, context is equally as important. The fact is, as Moody’s agrees, Aussie banks are heavily tied to the mortgage market, meaning the risk of loan defaults threatens profitability in the sector.

“The risk of mortgage delinquencies will be highest for borrowers with high loan balances and where amounts are close to buyers’ maximum borrowing capacities,” Moody’s said.

“However, we expect delinquency rates will only increase moderately overall this year because interest rates, while rising, are still low.”

This could change if and when the Reserve Bank of Australia (RBA) continues on its path of rate hikes into FY23 and FY24. On Tuesday, the RBA hiked the cash rate by 50 basis points to its highest level in years.

An upward trajectory in rates also marks down the value of housing in Australia, creating a two-pronged threat for banks. One is that borrowers are less likely to sell their house at the price they bought it. Second, the value of mortgage collateral (property) is also lower, hurting bank loan-to-value (LTV) ratios and other metrics.

Going forward, there could also be an increase in the provision for bad debts on banks’ income statements, thereby hurting earnings.

These points appear to have been accepted by the market, resulting in a sell-off throughout the entire sector.

In the last 12 months, the CBA share price has wormed more than 6% into the red and is trading down more than 6% this year to date.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

A man smiles as he holds bank notes in front of a laptop.
Bank Shares

ANZ share price on watch following equity raising update

ANZ has raised money to fund an acquisition...

Read more »

ASX 300 share investors in suits running a race on an athletics track
Bank Shares

Up 10%, why has the Westpac share price smashed other ASX banks this past month?

The Westpac share price has surged this month despite rocky Q3 earnings results.

Read more »

Confident male executive dressed in a dark blue suit leans against a doorway with his arms crossed in the corporate office
Bank Shares

The NAB share price has gained 5% since last week’s update. What’s next?

NAB shares are in focus as the big bank steadily climbs on the ASX.

Read more »

Two businesspeople in suits run, one chasing the other.
Bank Shares

Can ANZ’s latest acquisition help it catch up to the other ASX 200 bank shares?

How much of a difference will buying Suncorp’s bank make? We take a look.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Bank Shares

Why is the CBA share price sliding today?

CBA shares are trading without rights on Wednesday.

Read more »

Woman on her laptop thinking to herself.
Bank Shares

Is the Bendigo Bank share price in the buy zone following Monday’s sell-off?

A broker gives its thoughts on the bank share's outlook following its post-earnings slump.

Read more »

A man in a suit smiles at the yellow piggy bank he holds in his hand.
Bank Shares

Is the Westpac share price a buy following the bank’s latest update?

Are Westpac shares a buy after its latest update?

Read more »

A man sitting at his dining table looks at his laptop and ponders the CSL balance sheet and the value of CSL shares today
Bank Shares

Is the CBA share price overvalued compared to other ASX 200 banks?

CommBank is the most exposed to any downturn in the Aussie housing market.

Read more »