The Commonwealth Bank of Australia (ASX: CBA) share price looks set to make it two consecutive days of declines on Tuesday.
In afternoon trade the banking giant's shares are down 0.7% to $81.74.
Why is the CBA share price sliding lower?
Investors have been hitting the sell button this week after analysts at Goldman Sachs downgraded the bank's shares from a neutral rating to a sell rating with an improved price target of $74.95.
This price target implies potential downside of ~8% over the next 12 months, excluding dividends.
Why has Goldman Sachs downgraded CBA's shares?
The broker notes that there have been three positive developments in recent months that have caused a sector re-rate.
These are the surprise election result, APRA's plan to replace its minimum 7% interest rate serviceability buffer for mortgage loans with a less onerous requirement, and the Reserve Bank of New Zealand taking a more conciliatory approach as it attempts to increase its banking system's capital requirements.
However, Goldman Sachs thinks "the impact on the sector's profitability of the sudden shift in the RBA's rate rhetoric is being underestimated by the market, particularly given the sector now trades on a 14.6x 12-mo forward PER, >1.0 standard deviation above its 15-yr average of 12.6x."
It added: "We had previously estimated that 50 bp of rate cuts would require a total of 20 bp of repricing to be earnings neutral and we note that since the Jun-19 rate cut, the delta in deposit rates has been less (i.e. worse) than we had anticipated in this scenario."
This, combined with its forecast for further rate cuts in 2019, has led to the broker downgrading its retail banking sector earnings per share estimates through to FY 2021.
Adding to the issues for CBA is its high-quality deposit base. Goldman expects this to drag on its profitability as rates go lower.
This is because "the rate it charges on its deposit base tends to be relatively low, which provides CBA with less opportunity to reprice them as cash rates fall. We therefore think that CBA's NIM trajectory will underperform peers as rates fall from an already low starting point."
But the broker isn't negative on all banks. It currently has a buy rating and $30.45 price target on National Australia Bank Ltd (ASX: NAB) shares and neutral ratings on both Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC).
