Commonwealth Bank of Australia (ASX: CBA) shares have been amongst the biggest beneficiaries of the Reserve Bank's most recent interest rate cut. Due to its solid dividend yield, its shares have surged more than 13% over the last fortnight and have today hit a new all-time high at $93.96.
Indeed, there are enormous expectations surrounding the stock leading into earnings season. Just as National Australia Bank Ltd. (ASX: NAB) did in its first quarter, Commonwealth Bank is expected to deliver a strong rise in cash profit. However, the market will likely be more focused on other aspects of the report, including these three…
Bad Debts
Each of the big four banks have delivered record-smashing profits in recent years, driven mostly by falling bad debt charges. In a low interest rate environment, bad debts have fallen to record-lows as borrowers have been able to pay off their debts with greater ease. Although many analysts believe bad debts will begin to rise in the near future, the market will likely be expecting impairment charges to remain relatively flat over the half. They should remain low for the foreseeable future with the RBA having cut interest rates even lower earlier in the week.
Margins
Australia's banks have been competing aggressively for new customers in this low interest rate environment, with each of the big four having passed on the RBA's full interest rate cut to customers. Westpac Banking Corp (ASX: WBC) went one better, cutting the rate on its standard variable loan by 0.28 percentage points.
As a result of this aggressive competition however, the banks' net interest margins (the profits they make on loans) have been narrowing. Commonwealth Bank's net interest margin seems likely to remain flat or fall, which would need to be offset by decent loan growth.
Dividends
Despite its lofty valuation, investors continue to buy the stock for its generous dividend yield. In 2014, Commonwealth Bank distributed a total of $4.01 per share in fully franked dividends, giving it a payout ratio just above 75%. Presumably, this will remain roughly the same in 2015, although the bank may be forced to slow dividend growth in the future if it is required to hold more capital in reserve. This would likely see a number of shareholders head for the exits.
Each of the big four banks offer generous dividend yields but given their expensive nature, they're by no means the best dividend stocks on the ASX right now.
