Could a RBA rate cut send the CBA share price higher?

Is the Commonwealth Bank of Australia (ASX:CBA) about to get a RBA cut boost?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Commonwealth Bank of Australia (ASX: CBA) share price could go into recovery mode if the Reserve Bank of Australia (RBA) cuts rates.

Funding pressure has caused National Australia Bank Ltd (ASX: NAB) subsidiary UBank to raise rates on a number of fixed-interest products by 20 basis points, according to the AFR.

Economists are now predicting that the RBA may have to cut rates to stop other major lenders like Westpac Banking Corp (ASX: WBC) and Commonwealth Bank from increasing their rates again.

Last year was a year of out-of-cycle rate hikes. I don't think you can attribute that as the main cause to the current problems we have in Australia, but it is a contributing factor. In my mind, the RBA shouldn't have been so quick to reduce rates a few years ago.

If the RBA were to reduce funding costs for banks and consumers it could send a collective sigh of relief through the economy. House price falls may slow, loan arrears could improve, business debt would be more affordable and credit cards could come back into fashion a little.

The big banks could use every tiny bit of help to boost their net interest margin (NIM), which is the difference between the rate they pay for funding compared to the rate they can lend the money at.

Future profits of the banks don't look very appealing. APRA wants the banks to hold more capital to be as safe as possible, whilst competition is growing in the lending industry with more online-only lenders and 'shadow banks'.

Foolish takeaway

Commonwealth Bank is trading at 13x FY19's estimated earnings with a grossed-up dividend yield of 8.5%.

Whilst Commonwealth Bank looks cheap against trailing metrics, I'm not sure what the next year or two has in store for Australia's biggest bank. It only remains cheap if the earnings and loan book remain solid. I think there are better ASX investment options out there.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »