The Commonwealth Bank of Australia Ltd (ASX: CBA) share price is on watch this morning ahead of Wednesday's full-year results announcement as investors price in the impact of recent rate cuts.
What's the outlook for the CBA share price?
Despite opening slightly up in morning trade, according to an article in the Australian Financial Review (AFR), analysts at Morgan Stanley are predicting the CBA share price could fall by as much as 20% in a lower interest rate environment.
The article said that Morgan Stanley late last week cut its price target on three of the four major banks.
While the revision was largest for Australia and New Zealand Banking Group Ltd (ASX: ANZ), it said CBA was most exposed because it has a higher valuation than the other banks, with its share price currently sitting at $81.88 per share.
As quoted in the article, Morgan Stanley analysts stated:
In our view, the combination of subdued loan growth prospects, downward pressure on margins from lower interest rates, and a reinvestment burden are likely to see the banks remain in an [earnings] downgrade cycle.
All this speculation comes ahead of Wednesday's full-year results release from Australia's largest bank, with the remaining three to report in late October or early November.
How could low rates impact on the CBA share price?
While lower rates have seemingly helped fuel a rebound in the domestic property market and lowered interest payments for variable rate investors, there are also potential downsides to the cuts.
The average Big Four banking yield has fallen by around 50 basis points (bps) to reflect the RBA rate cut of the same amount, while lower rates could also pressure the Big Four banks' net interest margins (NIMs).
The NIM is a key profitability measure for the banks which provides an indication of a bank's financial health and represents interest earned minus interest paid by the bank.
CBA currently boasts a NIM of 2.10%, which fell 4 bps lower in its first-half results back in February.
While the CBA share price has climbed higher 15.4% so far this year and 12.4% since the Federal Election alone, but evidence of weak earnings could see the CBA share price plummet lower on Wednesday.
