Shares in Commonwealth Bank of Australia (ASX: CBA) have had an absolute shocker this week.
Actually, scratch that. It has been a rough month and an even tougher year.
CBA shares have now plunged 12% over the past five trading days, fallen 16% in the past month, and are sitting more than 7% lower than this time last year.
That is a brutal reversal for what had long been considered the market's untouchable blue-chip bank stock.
So why is everyone suddenly rushing for the exits?
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Painful double whammy
On Wednesday, CBA shares suffered one of the sharpest single-day falls in the bank's history after getting hit by a painful double whammy.
The first blow came from Tuesday night's Federal Budget. Investors appear increasingly concerned the government's housing policy changes could pressure the property market and, in turn, hurt major ASX banks like CBA.
The abolition of negative gearing and tighter capital gains tax settings don't exactly scream "housing boom". If property prices soften, it could eventually flow through to slower mortgage growth, weaker lending activity, and rising credit risk for the banks.
Bracing for tougher times
But the budget alone wasn't enough to spark such a savage sell-off. The second hit came from CBA's own quarterly update released Wednesday morning.
At first glance, the numbers looked reasonably solid. Operating income was flat over the three months to 31 March, while cash profit still managed to rise 4% compared to the previous quarter.
However, investors in CBA shares seemed far more focused on what management said about the future.
CBA warned that economic and geopolitical risks are increasing. More importantly, it backed up that caution by lifting its collective provisions for loan impairment by $200 million. That followed another $316 million in loan impairments during the quarter itself.
In other words, the bank is preparing for a potentially tougher environment ahead and the market clearly did not like the signal.
Limited growth pathway
But there is another reason this sell-off may have become so violent.
CBA shares were arguably primed for a correction long before this week's drama unfolded.
There is no denying CBA is one of Australia's highest-quality businesses. It dominates the local banking sector, has a powerful brand, and continues generating enormous profits. But it's also a mature bank operating in a highly competitive market with limited long-term growth avenues.
Yet even after the recent plunge, CBA still trades on a price-to-earnings (P/E) ratio of around 25. That remains dramatically more expensive than rivals like National Australia Bank Ltd (ASX: NAB), which currently trades closer to 19 times earnings.
Valuation gap
For many analysts, that valuation gap simply became too difficult to justify.
According to TradingView data, broker sentiment toward CBA shares remains firmly negative even after the sell-off. Morgans retained its sell rating following the quarterly update and cut its price target to $119.40. That still implies roughly 23% downside from current levels.
The broker noted that growth momentum has slowed since the first half and argued the shares continue to look expensive despite the recent crash.
So, is the sell-off over?
Possibly not.
Because while CBA remains a world-class bank, investors are finally starting to question whether its premium valuation was ever sustainable in the first place.
