CBA Leads Bank Share Price Correction

The article is entitled â€Å"CBA leads bank share price correction† is analysed in this report. The article primarily discuss how share price has plunged deeper in the major banks into correction territory following a weak trading update arising from Commonwealth Bank disclosing increasing costs, narrowing margin of profit and escalating loan losses. It indicates that CBA has agonized its sharpest day-to-day share price plunged ever since global financial crisis. CBA’s shared price plummeted 5.9% to 82.98 dollars culminating to a further worsened investor sentiments. This followed a third-quarter unchanged profit report by CBA remain constant at $2.2 billon. This plunged has adversely affected CBA’s competitors including Westpac, NAB, and ANZ Banking Group. The article concludes that the next immediate teething problem for the sector is profit result for NAB merged with 3 big 4 trading ex-dividend over the following week. The accounting theory used in this analysis is Efficient Market Hypothesis (EMH)-semi strong form (SSF). EMH describes an investment theory that posits it is not possible to ‘beat the market† due to stock market efficiency that makes available share prices to incorporate as well as reflect every relevant information. Stock trade always at their fair value on stock exchanges which make it an impossibility for investors to buy undervalued stocks and sell stocks for exaggerated prices (Chi, Tripe & Young, 2014). Hence, it remains an impossibility to outperform the entire market via expert stock selection and market timing. The investor can solely likely to acquire higher returns through the purchase of riskier investments. SSF implies every public information is computed into current share price of stock implying neither fundamental nor technical examinations can be utilized to accomplish superior returns. Hence, solely information hidden from the public is suggested to benefit the investors looking to earn abnormal ROI as every other information remains accounted. There is a direct relationship between the share price plunge and the information availed to the public by the Commonwealth Bank (CB) which is what SSF posited above. The plunge in shares in leading banks plunged deeper into correction territory only following a weak trading update given by the CB. This indicates that the public had the information that costs were rising, profit margins were narrowing and the loans losses were rising. According to SSF, every information available to the public is accounted for in the stock prices and no amount of technical or fundamental analysis gives superior returns. This describes why the investors used CB’s update to punish the shares in CBA thereby plunging 5.9%. Indeed, CLSA Brian Johnson confirmed this hypothesis by stating that investors had already seized on the bad news of CBA relating to margins, bad loans and costs. Moreover, the David Ellis confirmed the SSF hypothesis by stating that the investors used the information thereby flocking to banks to exploit their huge dividends as bank shares were being sold off due to increasing yields hence ‘yield trade’. It is also believed that investors could be starting to question whether the fundamentals could justify the hideously expensive valuation, anchored on measures like price-to-earnings as well as price-to-book ratios. This means that the investors are aware of the SSF hypothesis that takes into calculation all public information into present stock share price and hence fundamental analysis cannot be applied to achieve gains by banks (Leuthold & Hartmann, 2013). Due to EMH, the investors behaved in the manner above because they believed that the market remains ubiquitous and, therefore, no quantity of analysis could assist them achieve alpha returns (Groenewold, 2012). Thus, because market is a reflection of its participants, the market is, therefore, all knowing, and becomes unbeatable. It knows the right value to assign to a given stock as stated by EMH. This explains the above plunges in bank share prices (Aitken, Almeida & McInish, 2013).   Ã‚  Ã‚   From the above information, it has been demonstrated that the share prices have extremely plunged due to the update by the Commonwealth Bank. This supports the EMH-semi strong form which posit that all publicly available information is accounted for and hence no degree of technical or fundamental analysis can help investors acquire alpha returns (Schenone, 2014). Aitken, M., Almeida, N., & McInish, T. H. (2013). Financial analysts and price discovery. Accounting & Finance, 48(1), 1-24. Chi, J., Tripe, D. W., & Young, M. R. (2014). Do exchange rates affect the stock performance of Australian Banks?. Available at SSRN 965599. Groenewold, N. (2012). Share market efficiency: tests using daily data for Australia and New Zealand. Applied Financial Economics, 7(6), 645-657. Leuthold, R. M., & Hartmann, P. A. (2013). A semi-strong form evaluation of the efficiency of the hog futures market. American Journal of Agricultural Economics, 61(3), 482-489. Schenone, C. (2014). The effect of banking relationships on the firm's IPO underpricing. The Journal of Finance, 59(6), 2903-2958.