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Q1: Why the CBA (ASX:CBA) share price got dumped 8%

The Commonwealth Bank of Australia (ASX:CBA) share price was crunched 8% lower today. It reported a lower net interest margin (NIM).

The Commonwealth Bank of Australia (ASX: CBA) share price was crunched 8% lower today.

CBA released its FY22 first quarter update to the market.

On first glance it didn’t seem bad at all. Compared to a year ago, CBA’s cash net profit after tax was up 20% to around $2.2 billion.

However, compared to the last quarter, the cash profit was actually down by 9%.

Bank profits can be heavily impacted by how much they provision, or un-provision, for bad debts. CBA said that excluding provisions, cash net profit was stable.

A key part of the disappointment came from the bank’s net interest margin (NIM).

NIM decline

The NIM is key. CBA generates a majority of its income from lending, so it in turn has an important impact on the CBA share price.

The net margin is comparing the interest income against the cost of funding that lending. Examples of funding includes customer deposits like savings accounts.

CBA said that its NIM was considerably lower in the quarter due to higher liquid asset balances, home loan price competition, low fixed rate loans and the low interest rate environment.

What to make of this for CBA

Bank’s have been offering mortgages with interest rates of around 2%, so it’s no surprise that the NIMs of banks are edging lower.

But banks can’t escape from the fact that a lower NIM means lower profitability.

But, some banks have been increasing their interest rates recently to get ahead of interest rate rises, and this could be a trend for the next few years as interest rates stabilise.

I don’t believe that interest rates are going to soar higher, but it does seem that they’re going up. This can help bank’s NIM, though the funding costs will probably go up as well. Bad debts could also increase as overleveraged borrowers face difficulties.

CBA is a quality bank, one of the best in the world. But it is also priced very expensively.

I think the recovery from COVID-19’s profit hit has happened – just look at the quarter on quarter numbers – so the limited growth and lower dividend yield (from the higher CBA share price) makes it seem unappealing to me.

I think that there are plenty of other ASX dividend shares, such as quality retailers or LICs that offer better yields and more profit growth potential than CBA, so that’s where I’m looking for income opportunities.

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