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Why is the CBA share price weighing on the bank sector?


Shares in Australia's biggest bank are still up 33% over the past 12 months.

Australia's biggest lender, Commonwealth Bank (ASX: CBA) has been in the spotlight after sliding below the crucial $100 level in the previous session. The stock was again under pressure on Thursday, down 0.6% to $98.41 at the time of writing, also leading other banking shares lower.

This is the second day in a row that the Big Four bank's share price has been under pressure.

Why are banking stocks under pressure?

CBA shares dived 8.1% on Wednesday, their biggest slide since the start of the COVID-19 pandemic in March 2020, after Australia's biggest lender outlined its quarterly trading update and warned that its net margin was "considerably lower" in the September quarter.

It had reported a net interest margin (what it earns on loans minus the costs) of 2.03% in the fiscal 2021 year and banking analysts believe it has now dipped to around 1.9%.

Like its Big Four peers, CBA has also been affected by the fierce competition to attract new customers, particularly in the key home loans market. As interest rates have fallen to record lows, banks' margins have been squeezed as they slash their lending rates for new customers, in an attempt to grow.

At the same time, they have been unable to offset this pressure by cutting deposit interest rates further. Customers have also jumped on to the fixed-rate home loan bandwagon, impacting margins further.

Reserve Bank governor Philip Lowe this week reiterated that the cash rate is not likely to increase until 2024. That means bank investors are unlikely to see any short-term relief from the low-interest rate crunch the lenders are enduring.

CBA downgrades

Even before CBA revealed its latest trading update, the stock had been seen as somewhat expensive, with a consensus target price of $95.50 a share, according to Bloomberg estimates. Analysts on Wednesday warned of material downgrades and have followed through by cutting their CBA price targets by an average of 3.9%.

These include: Bell Potter cutting its target price 5.9% to $111, JP Morgan analysts slashing theirs 5.3% to $90 a share, Goldman Sachs down 3.2% to $81.40, Morgan Stanley cutting 2.8% to $87.50 and Macquarie's analysts trimming their target price by 2.8% to $86.

"We believe shares are overrated, with the market likely overestimating stronger earnings growth to peers," Morningstar analyst Nathan Zaia said in a note to clients. He expects CBA's net interest margin to trend under 2% in FY22 and 1.95% in FY23.

Meanwhile, Morgan Stanley also reduced the banks sector weightage in its model portfolio to "equal-weight" to reflect the increased headwinds to sector earnings.

Still, investors have something to look forward to – a grossed-up dividend yield of 5.8% on CBA shares and a 33% increase in value over the last 12 months.

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