Why Morgan Stanley expects CBA shares to plunge another 22%

Following a stellar multi-year run, commencing in October 2023, Commonwealth Bank of Australia (ASX: CBA) shares have faced growing headwinds over the past months.

In late morning trade on Tuesday, shares in the S&P/ASX 200 Index (ASX: XJO) bank stock are down 0.2%, changing hands for $160.59 apiece.

Now, that outpaces the 1% losses posted by the ASX 200 at this same time today. But over the past 12 months, CBA shares have dropped 11.8% compared to the 0.4% one-year loss posted by the benchmark index.

Even if we add in CBA’s fully franked 3.1% trailing dividend yield, the big four Aussie bank has still underperformed.

Part of that pressure has stemmed from repeated analyst warnings about CBA’s premium valuations relative to peers, such as ANZ Group Holdings Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), and National Australia Bank Ltd (ASX: NAB).

Part of it has been driven by broader investor rotation into ASX mining shares such as BHP Group Ltd (ASX: BHP) amid booming global commodity prices.

And a growing part of the recent selling pressure stems from the deteriorating outlook for the Aussie economy, particularly its core housing market.

Which brings us to…

Why CBA shares just got a major downgrade

As if the ASX 200 banks didn’t have enough on their plates, the new Federal Budget property tax changes impacting negative gearing on residential homes look set to unleash further difficulties.

Indeed, on Friday, Morgan Stanley cautioned that the tax shakeup, combined with the three RBA interest rate hikes this calendar year, could see Aussie home prices tumble 10% by the end of 2027.

This could also see ASX 200 bank stocks facing a big increase in non-performing loans over the year ahead, even as their new housing loans face a decline.

According to Morgan Stanley analyst Richard Wiles (quoted by The Australian Financial Review):

Our channel checks suggest that there have already been changes in housing market sentiment, borrower behaviour and developer plans.

Auction clearance rates are falling, investors have stepped aside, new development signoffs are on hold, and price expectations are being revised…

Over the next year, we expect slower loan growth, emerging margin headwinds, rising loss rates, and greater scrutiny of capital buffers. This will lead to further downgrades and an ongoing de-rating.

In light of these concerns, Morgan Stanley cut its price target for CBA shares to $125. That represents a potential further downside of 22.2% from current levels.

As for the other big four ASX 200 bank stocks, the broker reduced its price target for NAB shares to $34.50, or 4.2% below current levels.

Morgan Stanley’s price forecast for ANZ was cut to $34, 0.8% above current levels.

And its price target for Westpac shares was cut to $31.50, 8.4% below current levels.

The post Why Morgan Stanley expects CBA shares to plunge another 22% appeared first on The Motley Fool Australia.

More reading

• Buy, hold, sell: Coles, BHP, CBA shares
• How to start investing in ASX shares with just $500
• BHP, CBA, and Westpac shares are sells this week: experts
• Which ASX bank stock is the best buy right now?
• Is the CBA share price a buy in June?

Motley Fool contributor Bernd Struben 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 BHP Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.