The Commonwealth Bank of Australia (ASX: CBA) share price is up almost 1% today despite a number of brokers decreasing expectations of the bank's future profits.
Not only does Citi continue to remain bearish on the bank, but UBS, Goldman Sachs and Deutsche Bank all lowered profit expectations.
The lowering net interest margin (NIM) is a key reason why many of the analysts are more cautious on the bank's near-term future. The NIM is simply the measure between the interest it charges on loans versus the cost of deposits it holds (or other sources of funding). The bigger the NIM the more profitable the bank is on its loan and deposit balances.
The problem for Commonwealth Bank is that there is a lot of competition in the sector these days. It's very easy for a borrower to compare a whole range of rates on different finance websites and find the lowest rate. Loan interest rates are becoming like commodities – you probably go for the cheapest one.
Not only are there big competitors like Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Group (ASX: WBC) and National Australia Bank Ltd (ASX: NAB), but there are a lot of smaller competitors as well.
I don't just mean Bank of Queensland Limited (ASX: BOQ), Suncorp Group Ltd (ASX: SUN), Bendigo and Adelaide Bank Ltd (ASX: BEN) and AMP Limited (ASX: AMP), but also others like ME Bank and several newer online-only competitors.
It's a crowded market.
Foolish takeaway
Commonwealth Bank has recently lowered its interest rate to try to win market share. It might win some customers but it will also be lowering the profitability on all of its loans.
Retail investors are drawn towards the attractive grossed-up dividend yield of 8.2%, hopefully it doesn't become a yield trap like Telstra Corporation Ltd (ASX: TLS) has been.
