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

cba shares

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.

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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 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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