The capital position of Commonwealth Bank of Australia, or CBA, would remain strong even after it uses up half of its surplus cash to buy back its shares, analysts said after the lender announced the plan along with its annual earnings.
CBA said it will conduct an off-market buyback of up to A$6 billion of shares, after its cash earnings, which exclude gains or losses on hedging, acquisitions or asset sales, grew 20% to A$8.65 billion in the last fiscal year that ended June 30. Its net profit was up 5.7% to A$10.18 billion, according to an Aug. 11 earnings release.
"CBA's capital levels will remain strong despite this capital buyback," said Lisa Barrett, analyst at S&P Global Ratings. The bank's common equity Tier 1 ratio will fall to about 12.1%, as a result of the buyback, but it remains above the Australian Prudential Regulation Authority's capital requirement of 10.5% for "unquestionably strong" capital levels, Barret said.
The biggest Australian lender by assets will join rivals Australia and New Zealand Banking Group Ltd., or ANZ, and National Australia Bank Ltd., or NAB, in returning surplus capital accumulated as the pandemic prompted them to conserve cash in 2020. ANZ plans to buy back up to A$1.5 billion of shares as part of its capital management plans, while NAB will buy A$2.5 billion of shares. Westpac Banking Corp. has yet to disclose its plans. Together, the big four Australian lenders are estimated to be sitting on A$33 billion of excess capital over regulatory requirements after cutting dividends in 2020 and selling noncore assets.
The buyback is "the most efficient and appropriate way to commence the return of surplus capital. Shareholders will benefit from the lower share count as it will support return on equity and dividends per share," CBA CEO Matt Comyn said.
The bank also announced a final dividend of A$2 per share, taking the full-year dividend to A$3.50 per share, up 17% over the prior year. CBA had earlier announced an interim dividend of A$1.50 per share.
Strong capital position
The bank's common equity Tier 1 capital ratio stood at 13.1% as of June 30. "Our common equity Tier 1 capital ratio represents approximately A$12 billion in surplus capital above unquestionably strong levels," Comyn said during the bank's results briefing. "This has put us in a strong position to be able to complete a A$6 billion off-market share buyback and still retain a large capital surplus."
The bank's capital levels will rise further after it completes the divestment of its asset management unit and the sale of its general insurance business. CBA in June agreed to sell its general insurance business to Hollard Group for A$625 million. The deal is expected to boost CET1 capital by A$400 million. It announced a deal to sell 55% of Colonial First State to KKR & Co. Inc. in May 2020, valuing the asset management unit at A$3.3 billion.
After accounting for the buyback and A$2 billion future proceeds from announced divestments, the bank will still have a capital surplus of around A$7.5 billion, said Nathan Zaia, an equity analyst at Morningstar. Assuming the bank targets a CET1 ratio of 11%, this means it will have A$5.5 billion in surplus capital, Zaia said. "We continue to expect this to be returned to shareholders via another buyback or dividends over the medium-term," the analyst noted.
"We will continue to hold capital ratios above the unquestionably strong benchmark in order to remain resilient to potential future stress events," CBA CFO Alan Docherty said during the results briefing. The proceeds from divestments will allow the board "the flexibility to consider further capital management initiatives, taking into account a range of factors, including finalization of Basel III requirements and target capital levels," Docherty added.
COVID-19 challenge
The recent lockdowns in parts of Australia following a resurgence of COVID-19 cases would pose near-term challenges, but the effects may not linger, CEO Comyn said.
"We expect growth will simply be pushed back by six months with the economy rebounding in late 2021 and growing strongly in 2022," the CEO said, pointing at significant household savings, employment rate and a strong housing market among positives for the Australian economy.
Australia has extended lockdowns in a number of states. New South Wales expanded the state's lockdowns to regional areas as the state imposed measures to contain the more infectious Delta variant. Sydney's lockdown is set to end on Aug. 28. The government extended the lockdown in Melbourne for another seven days until Aug. 19.
The bank's asset quality is expected to remain strong despite the stresses facing a section of households and businesses from COVID-19, Ratings' Barrett said. "We believe credit losses will ease to pre-COVID levels in the next two years after a significant rise from historical lows," Barrett added. "We consider that CBA's strong retail franchise will continue to support its above-system loan and deposit growth."
