CBA completes $6bn share buyback, as investors endure large scale backs

Attention is shifting to whether CBA returns further capital after ruling off a record $6bn share buyback, where bumper demand spurred $18bn in scale backs for investors.

CBA has ruled off its $6bn buyback after the banking sector embarked on a wave of capital returns. Picture: NCA NewsWire/James Gourley

Commonwealth Bank has ruled off a record $6bn share buyback, shifting attention to whether it will return further capital given bumper demand spurred $18bn in scale backs of investor applications.

The bank on Monday said the off-market share buyback of 67.7 million shares was completed at $88.62 a share, or a 14 per cent discount to a five-day average price of $103.04. Total demand for the buyback came in at a whopping $24bn, triggering the scale backs in shareholder applications.

Three of the big four banks are undertaking a capital return bonanza, after severe Covid-19 loan losses did not eventuate and they pay out proceeds from large asset sales.

CBA chairman Catherine Livingstone said the board was pleased with the buyback’s outcome and the “exceptionally strong” investor demand.

“To meet that demand, institutional and retail applications have been scaled back on a pro-rata basis to ensure that shareholders are treated on an equitable basis,” she added.

“Coupled with the total dividend of $3.50 a share paid in FY21, today’s buyback of $6bn of CBA shares will see more than $12bn in value returned to shareholders over the course of the last 12 months. This is both a reflection of CBA’s strong capital position and our exceptional operational performance based on the progress we have made in executing the group’s strategy.”

Ms Livingstone said after the buyback and payment of the $2 per share final dividend CBA’s capital position, its common equity tier one capital ratio as at June 30, would continue to be “unquestionably strong” at 11.8 per cent.

That is above the banking regulator’s key threshold of 10.5 per cent, and is yet to include business divestments CBA has earlier flagged will complete before the calendar year’s end such as the sale of a 55 per cent stake in its Colonial First State unit to KKR.

“The group remains well placed therefore to continue to support our customers, especially during these challenging times, while managing for any ongoing uncertainties,” Ms Livingstone said.

CBA noted the buyback represented 3.8 per cent of the issued share capital and reduced the bank’s common equity tier one capital ratio by about 133 basis points, based on June 30 reported capital.

But investors who asked for larger participation in the transaction endured sharp scale backs in the applications made to participate in CBA’s buyback.

“Due to the strong demand for the buyback, a scale back of applications was required. In line with the terms of the buyback booklet, the scale back was structured to minimise disadvantaging shareholders with a small number of shares,” CBA said in a statement.

“Eligible shareholders who offered to sell their shares at a 14 per cent discount or as a final price application, had a priority allocation of 100 shares (or lesser number) bought back before any scale back was applied.

“Applications for more than the priority allocation were accepted, but scaled back by 79.4 per cent on a pro-rata basis.”

CBA joined the capital return frenzy in August with its $6bn share buyback for investors, as it posted a jump in annual cash profit to $8.65bn underpinned by strong lending and lower loan impairments.

CBA, ANZ and NAB all embarked on 2021 capital management initiatives as risks related to Covid-19 loan losses receded.

ANZ initiated the sector’s capital management wave, announcing it would return up to $1.5bn through a buyback. NAB followed with a $2.5bn buyback, despite raising capital last year. Westpac is widely expected to announce a capital return for investors in November to accompany its annual earnings results.

The shares bought back by CBA are being cancelled, and the bank will make payments to investors on Friday.

CBA’s statement said a class ruling by the Australian Taxation Office was expected to confirm the tax implications of the buyback, and that the capital component of the price would be $21.66, while the fully-franked dividend part would be $66.96.

The bank’s shares soared 5.1 per cent to $105.16 on Monday, outpacing a 1.3 per cent rise in the S&P/ASX200.

But Citigroup banking analysts are taking a cautious approach to the major banks – given the sharp rally this year – with Westpac being the broker’s only “buy” rating.

“The simultaneous recovery of all the major banks leaves them all looking modestly overvalued,” Citigroup said. “CBA is, as it is most of the time, a real outlier. We would judge NAB (National Australia Bank) and WBC as more ‘modestly’ overvalued and closer to being in the ‘neutral camp’ on today’s metrics.

“Consequently, the logical conclusion is that the market is already pricing in underlying ROE (return on equity) improvement in FY22 and beyond.”

At CBA, there remains scope for further capital to be returned, something analysts will be watching.

At the bank’s full-year results a presentation showed it would still have $7.5bn in surplus capital as at June 30, after subtracting the $6bn off-market share buyback. The presentation to investors said the capital balance provided flexibility for the board on the “ongoing consideration of capital management”.

Asked about the potential for further capital returns, CBA chief executive Matt Comyn didn’t provide a direct answer, but said the bank was positioned for several scenarios and had capital flexibility.

“We feel we are well prepared for a range of different economic scenarios from both a capital as well as a loan loss provisioning perspective,” he said in August.