Commonwealth Bank of Australia (ASX: CBA) has seen its share price sink 15% since the start of the year when the share price hit a high of over $85.
For shareholders buying in for those lovely fully franked dividends – they certainly got that, but that income has been more than wiped out by the falls in the share price since.
CBA's share price is now around $72.27, and not far away from its 2016 low of $69.79 reached in April.
There are a number of reasons why CBA's share price could easily blow through that and sink further.
- Standard & Poor's has placed Australia on negative watch which could see us lose our AAA credit rating. The big four banks Australia and New Zealand Banking Group (ASX: ANZ), CBA, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) could all face a downgrade to their credit ratings too.
- The banking regulator, APRA, has made it clear that Australia's banks will need to hold more capital to maintain a top quartile ranking amongst their global peers – a recommendation coming out of the Financial System Inquiry.
- Bad debts are rising, and the cycle appears to be turning towards a slow and steady rise in bad debts and higher provisions. That could mean lower earnings and flat or lower dividends to shareholders.
- Slower economic growth in Australia, not to mention the potential for the property market to head backwards.
But despite all that, CBA currently sports a P/E ratio of 13.5x, below its long term (since 1992) average of 14.5x.
CBA's price/book ratio currently stands at 2.1x – also below its long term average of 2.2x (since 1992).
There's just one proviso about those ratios. Australia hasn't had a recession since 1991/92, so the averages may be skewed more positively than during a normal business cycle. And the longer Australia goes without a recession, the closer we get to the next one.
Foolish takeaway
CBA is often regarded as Australia's highest quality bank – thanks to its high return on equity, revenue growth and a range of other factors. On that basis, it's also worth paying more for its shares compared to other banks.
For investors with a long term investing horizon, a fully franked dividend yield of 5.8% also offers some compensation for potential further falls in the share price.
