Commonwealth Bank of Australia (ASX:CBA) share price rises despite downgrades

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.

For some truly exciting dividend potential you should read about this wonderful ASX business that is likely to grow its dividend by more than 25% this year!

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But the real action, in my opinion, is what companies are doing with dividends.

What does this mean for you? Well there is one stock I've found that could very well turn out to be THE best buy of 2018. And while there's no such thing as a 'sure thing' when it comes to investing - this ripper might come as close as I've ever seen.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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