Dividend to power Commonwealth Bank shares over $100

The prevailing market view on Commonwealth Bank is not so much if the stock will shoot through $100, but when and by how much.

CBA CEO Matt Comyn could soon have a hundred reasons to be smiling. Picture: Adam Yip

The prevailing market view on Commonwealth Bank is not so much if the stock will shoot through $100 a share but when and by how much.

CBA’s gravity-defying run is not a recent phenomenon, although it depends on your starting point.

Over the last two-and-a-half years under chief executive Matt Comyn, after its Austrac and financial planning woes receded into history, the nation’s premier bank has traded at or around its eye-watering 37 per cent premium to major bank rivals, on JP Morgan numbers.

The premium narrows over a five-year period once those regulatory entanglements become part of the narrative.

There’s some comfort in that for the three other three banks – while CBA has been dominant for a long time, it’s not a machine (not yet, at least) and can still fall foul of wrongdoing and human error, just like any other large institution.

In fact, as good as CBA’s operational performance has been, one of the main contributors to the stretch of daylight between the bank and its rivals is because it’s found itself in a sweet spot, and there’s every reason to think it will happily stay there for the foreseeable future.

With the exception of ANZ, CBA was early to embark on a simplification program, thanks largely to scathing reviews of the bank’s risk governance and culture by Austrac and the Australian Prudential Regulation Authority.

Cash is continuing to flow in from non-core assets sales, with the group’s common equity tier one ratio at a sector-leading 12.7 per cent and a further 32-42 basis points to come from previously announced but yet to be completed divestments.

With Westpac effectively handcuffed by regulators after its own Austrac debacle, CBA is the only major bank with a large and growing capital surplus and a healthy franking balance of $2.3bn. It is now regarded as the most likely of the big four to kick off a sector-wide round of capital management initiatives worth about $22bn.

The odds favour CBA unveiling a tax-effective off-market buyback in August worth about $6bn when the bank announces its full-year result.

If so, the structure is likely to be similar to Woolworths’ $1.7bn buyback of 4.5 per cent of the company’s stock, which was completed in May 2019.

In CBA’s case, there could be more than one buyback given the group is nursing a capital surplus of $11.5bn based on the prudential regulator’s unquestionably strong CET1 target of 10.5 per cent plus a further 50 basis points for comfort.

While the bank is uniquely placed among the majors, it has also outperformed.

It is winning the market share battle and has the potential to make further inroads into the hotly contested SME sector.

In the March quarter, it increased business lending by $3bn compared to the preceding quarter, growing at more than three times the average of the banking system.

Household deposits expanded at 1.4 times the system and home lending by $6.7bn or 1.1 times the system.

It’s widely accepted now that CBA is leveraging a digital and technological advantage.

Once these competitive advantages are entrenched, they become more difficult to dislodge, leaving the bank free to exploit its leading main financial institution score.

Capital management is not a given, with CBA pointing out at last week’s quarterly update that it depended on a continuing trend of domestic economic improvement, the bank’s ongoing assessment of credit quality, and guidance from regulators.

However, any sensible retiree or owner of a self-managed super fund is not going to look a gift horse in the mouth and sell their CBA shares ahead of a monster prospective buyback.

With sellers scarce and a surplus of buyers keen to share in the riches, the CBA register is tightly held.

Barring unforeseen events, the stock is likely to sail through $100 in the coming weeks before meeting serious resistance.

Quick lending plan

ANZ will launch its digital platform for small business lending, GoBiz, in the next few weeks, which enables small businesses to link their accounting software with the bank to get quick approval for loans worth up to $1m.

Like National Australia Bank’s QuickBiz platform, which hit the market in 2016, GoBiz can link with all the major accounting packages, including Xero, MYOB and QuickBooks.

The time it takes for customers to get cash in their accounts from filling out the loan application will collapse from 30 days to four days.

ANZ concedes NAB was first to market with QuickBiz but believes it will launch with a superior product.

The formal release of the platform coincides with the 12-month extension in last week’s federal budget of the instant tax write-off for eligible equipment purchases.

ANZ general manager for small business Paul Presland says equipment sales are up 30-40 per cent from pre-COVID levels, although there were pockets of weakness such as the hospitality sector, particularly cafes and restaurants in central business districts.

Existing and new-to-bank customers will be able to access GoBiz, which has been in pilot for several months and can also be used for working capital loans.

ANZ has about 500,000 SME customers but only one-third have borrowing needs.

About 70 per cent of the nation’s small businesses use the major accounting software packages.

Once GoBiz is launched successfully into the SME sector, ANZ expects to introduce it to a larger customer base, with the main constraint being the complexity of the loan as opposed to its size.

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Twitter: @Gluyasr

Originally published as Dividend to power Commonwealth Bank shares over $100