Shares in the Commonwealth Bank of Australia (ASX: CBA) could be impacted by a potential price war in the near future.
Australia’s largest bank has moved its latest chess piece to lure new customers away from the other big banks.
At Monday’s market close, the CBA share price ended 1.62% higher to $103.94. It’s worth noting that its shares are around 4.5% off the all-time high of $109.03 reached in mid-August.
What moves is CBA making?
According to an article in The Age, CBA is the latest amongst many financial institutions seeking to attract new customers by cutting variable interest rates. CBA is offering extremely low rates to new clients who are considered low risk and have a 30% deposit on hand.
The trend in cutting variable rates is expected to further accelerate the already booming housing market.
According to the article, one analyst says reducing variable rates could also negate the Australian Prudential Regulation Authority’s (APRA) efforts to curb excessive household debt.
APRA’s latest policy requires financial institutions to evaluate new borrowers at an interest rate that is 3% higher than the actual loan rate. Previously, the ‘interest rate buffer’ recommended by APRA was lower at 2.5%.
APRA is seeking to ensure borrowers can afford their loan repayments both now and into the future.
However, the increased interest rate buffer will have less of an effect if it is added to reduced variable rates, the analyst reportedly pointed out in a note to clients.
The big four banks also have access to cheap funding including low-cost deposits and wholesale rates, as well as the $200 billion Reserve Bank scheme. The latter is an established funding facility that can be used to give customers rock bottom interest rates.
Time will tell where CBA shares end up when the company reports its first-quarter trading update on 17 November.
CBA share price summary
It’s been a solid 12 months for CBA shares, rising by 50% in value for investors. When looking at year-to-date, its shares have lifted by more than 25% for the period.
CBA commands a market capitalisation of roughly $177.36 billion, making it the highest valued company on the ASX.