CBA sale could yield buyback: analysts

Commonwealth Bank could launch a share buyback in the next financial year to redistribute capital raised by the sale of its life insurance and global asset management businesses, according to UBS analysts.


UBS analysts Jon Mott and Rachel Bentvelzen described CBA’s $3.8 billion sale of its Australian and New Zealand life insurance businesses – and the potential IPO of Colonial First State Global Asset Management – as strategically important but financially immaterial given the operations only contribute about two per cent of net profit.

They have assumed CBA will return capital via a buyback during the 2018/19 financial year, leading them to downgrade their earnings per share estimates for the lender that year by 0.4 per cent.

“We see this as a rational strategic decision by CBA, which should enable it to be more focused on its core banking businesses,” the UBS analysts wrote in a note to investors.

“The financial impact is largely immaterial.”

They said CBA is still one of the world’s premium banking franchises, but said the AUSTRAC money-laundering allegations that forced the exit of chief executive Ian Narev are a major concern.

“However, we believe the anti money-laundering allegations and upcoming change in CEO are likely to be an ongoing distraction,” they wrote.

“As a result, despite its business momentum and its share price correction, we believe it will be challenging for CBA to outperform.”

CBA shares fell about 15 per cent in a little more than a month following the AUSTRAC allegations in July.

They have recovered some ground since and, at 1130 AEST on Friday, were up 71 cents, or 0.9 per cent, to $76.78.

CBA said on Thursday that the life insurance sale will be recorded as a loss of about $300 million, but will release approximately $3 billion of common equity tier 1 (CET1) capital.

That will lift CBA’s CET1 ratio above the 10.5 per cent benchmark the Australian Prudential Regulation Authority has instructed the big banks to reach by January 2020.

Global ratings agency Moody’s said the sale was credit positive but was similarly wary about the money-laundering accusations.

“The outcome of these proceedings could result in a financial penalty which, depending on its size, could have implications for the bank’s capital position,” Moody’s said in a note.