The CBA share price is down 5%. Should investors jump on this?

Australia’s biggest bank is taking a beating today, it’s down 5%. Is this an opportunity yet?

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Key points

  • Brokers think that CBA’s margins can benefit from higher interest rates, however bad debts could rise 
  • CBA shares are down approximately 5%, which is a similar fall to the ASX 200 
  • Morgans thinks that there’s more declines to come for CBA shares, though the dividend is expected to rise 

The Commonwealth Bank of Australia (ASX: CBA) share price has dropped quite a bit since the Reserve Bank of Australia’s (RBA) move to increase the Australian interest rate by 50 basis points, or in other words 0.50%. CBA is down around 15% over the last week.

It was a big move by the RBA. It had been two decades since the last time there was an increase that big.

Meanwhile, there’s volatility for the ASX share market today and CBA is getting caught up in that. At the time of writing, CBA is down around 5% and so is the S&P/ASX 200 Index (ASX: XJO)

Experts have been looking at CBA shares and considering whether the biggest ASX bank is an opportunity or not. A lower price doesn’t automatically mean that a business is a good idea.

Is the biggest bank in Australia now an opportunity? Or could it drop further?

Broker ratings on the CBA share price

There is a lot of negativity about CBA shares at the moment.

For example, Citi had rated it as a sell. Morgan Stanley and Macquarie had similar ratings of underweight and underperform. The Morgans rating is a reduce.

With the CBA share price down 5% in early trading, it has now reached the pessimistic price targets of most of the brokers I mentioned, which was around $90. Prior to today, those $90 price targets were suggesting declines.

Morgans thinks that there could be a further decline to come with a price target of $77. That would be a decline of around 15% over the next year.

The experts recognise that the increase in the interest rate can help the net interest margins (NIMs) of CBA.

However, there is a view from some of these experts that there’s danger – higher interest rates could lead to higher bad debts and reduce the attractiveness of the dividend yields of banks.

Banks have been talking about how net interest margins have been under pressure for some time because of competition, low-margin fixed interest products and so on. Time will tell whether a higher NIM can offset some of the worries that brokers are pointing to.

What’s the valuation now?

A cheaper valuation can make an investment more attractive, so it’ll be interesting to see if any brokers change their ratings now that CBA has materially dropped.

Using Morgans’ estimates, the CBA share price is now valued at 17 times FY22’s estimated earnings and slightly under 17 times FY23’s estimated earnings.

But, Morgans is expecting a growing dividend from the big bank. The estimated grossed-up dividend yield is 5.7% in FY22 and 6.25% in FY23.

While the profit estimates from the other brokers are somewhat similar, Citi is expecting a much bigger dividend. The FY22 grossed-up dividend yield is projected to be 6.2% and the FY23 yield could be 7.4%.

CBA share price snapshot

While CBA shares have dropped 15% over the past week, it only registers an 8.5% drop in the last six months. It’s also back to where it was just before the COVID-19 crash in 2020.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison 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 recommended Macquarie Group Limited. 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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