Yesterday was a session for the ages. At least for Commonwealth Bank of Australia (ASX: CBA) shares.
The ASX's largest bank, and, until recently, largest stock, was hit with what was possibly its worst one-day fall in history yesterday. The bank ended trading on Tuesday at $171.57 a share. But CBA had a horror show of a day yesterday, and ended up finishing the session at just $153.67 a share. That was a fall worth a whopping 10.43%. That's pretty significant when you are the largest stock on the index (well, after yesterday's performance, CBA lost its crown to BHP Group Ltd (ASX: BHP)).
This drop was enough to drag the entire S&P/ASX 200 Index (ASX: JXO) down yesterday, a pretty remarkable feat when almost every other corner of the markets did quite well.
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A shocker for this ASX 200 bank stock
Today, CBA plunged even further upon market open, hitting a new 52-week low of $151 a share this morning. However, investors seem to have decided that enough is enough. At the time of writing, Commonwealth Bank stock is back in the green, currently up 0.54% at $154.50. Even so, there is no doubt that this market darling has lost quite a bit of paint this week.
The catalysts for yesterday's drop seemed to be a reaction to the new budget on Tuesday night, which investors seem to be concluding will hurt ASX banks like CBA. The abolition of negative gearing and a tighter capital gains tax don't exactly bode well for short-term property prices, after all.
Also playing a role was CBA's quarterly update, which was released yesterday morning. As we covered at the time, this update revealed that CBA experienced flat operating income over the three months to 31 March, but did manage to post a 4% increase in cash profits against the prior corresponding quarter.
But what seemed to get up investors' noses was the bank's outlook. CBA warned that economic and geopolitical risk is rising, and put its money where its mouth is, increasing its collective provisions for loan impairment by $200 million. That was after recording impairments of $316 million for the quarter.
CBA shares were primed for a correction
I was not at all surprised to see CBA taken down to earth yesterday. As I have written about many times before, this bank has enjoyed an uncommonly generous valuation from ASX investors for a long time now. CBA is a high-quality company to be sure, arguably one of the best in Australia. But it is also a massive and mature company without a significant growth runway ahead of it. To illustrate, CBA posted a 6% rise in net cash profits to $5.45 billion back in its half-yearly earnings in February. Pre-provision profits were up 5% to $8.13 billion.
Solid numbers, sure, but nothing to write home about.
Yet CBA still trades on a price-to-earnings (P/E) ratio of 25 today. That's notably higher than its next-closest rival, National Australia Bank Ltd (ASX: NAB). NAB shares are on a P/E ratio of about 18 today. For some additional context, Instagram-owner Meta Platforms Inc (NASDAQ: META) currently asks a P/E of 22.4. CBA's price-to-book (P/B) ratio is also looking lofty for a bank at a huge 3.8.
So I think CBA shares were an accident waiting to happen. They potentially still are at the current share price. As such, you won't see me buying this dip.
