At time of writing, the share price of Commonwealth Bank of Australia [ASX:CBA] is up 1.1%, trading at $69.71.
This marks a brief respite from a sustained year of downwards trading:
It has also been a good day for the other Big Four banks with National Australia Bank Ltd [ASX:NAB] up 1.2%, Australia and New Zealand Banking Group [ASX:ANZ] up 1.3%, and Westpac Banking Corporation [ASX:WBC] up 1.45%.
CBA’s earnings update
CBA announced a 5.7% fall in first quarter cash earnings — down to $2.5 billion for the past quarter — compared with $2.65 billion last year.
In the announcement CBA cited a lower net interest margin as the primary factor.
Net interest margin is a measure of how profitable a bank is based on the difference between interest income generated by a bank and the interest it pays out to their lenders (RBA etc.).
CBA explained that this movement in the net interest margin was down to higher funding costs and an increased amount of bad debt.
By bad debt, CBA is referring to home loan impairments which are loans where it is
This could be a worrying sign for the economy more broadly as the risk of a credit crunch and a housing market dip coinciding may be toxic.
Bank share prices reacting to RBA interest rates
One possible explanation for the positive share price action for the Big Four banks hinges on interest rates.
In its November monetary policy meeting, the RBA kept the interest rate at 1.5%.
Interest rates remained at historically low levels because the RBA believes the economy is in a good position at least for the next two years.
Going forward, CBA’s share price could be sensitive to a variety of factors, but a further downturn in the housing market looms as the primary factor.
A sharp fall in prices could impact home loan impairments as customers struggle to make mortgage payments.
Shares of CBA and the other Big Four may be one to steer clear of for the foreseeable future.
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