CBA poised to join banks’ capital return parade, post $8.6bn profit
Commonwealth Bank is set to join two of its rivals in showering investors with capital, as the lender prepares to post an expected annual profit of $8.6bn.
Commonwealth Bank is set to join two of its rivals in showering investors with capital, as the nation’s largest lender takes renewed Covid-19 risks in its stride and prepares to post an expected annual profit of $8.6bn.
CBA will set the tone for the sector’s earnings and dividend prospects when it hands down full-year earnings on Wednesday, alongside an anticipated multibillion-dollar capital return to shareholders.
Chief executive Matt Comyn’s comments on the economy’s ability to survive lockdowns in NSW and Victoria will be in focus after the Reserve Bank lowered its 2021 growth expectations and some economists raised the prospect of another recession.
“In the outlook statement I’m sure they (CBA) will point to being well-provisioned, because a lot of the Covid provisions haven’t been used or written back,” Regal Funds Management’s Mark Nathan said.
“We have a (pandemic) playbook, and there’s no reason to believe even if this (lockdown) drags on, we won’t see the economy bounce back strongly.
“Some of the lending momentum may come out while we are in lockdowns and winter … but we know it (credit growth) will come back with a vengeance when we come out of lockdown due to buoyant house prices and cheap debt.”
Mr Nathan noted that two of CBA’s peers last month announced share buybacks, suggesting the RBA and banking regulator were “not too perturbed” about capital returns during lockdowns.
“The markets well and truly expect some level of (CBA) capital management,” he said.
ANZ got the ball rolling in the sector, last month announcing it would return up to $1.5bn to investors through a share buyback. NAB followed with a $2.5bn buyback, despite raising capital last year as Covid-19 panic gripped markets.
Jefferies analyst Brian Johnson expects CBA to announce a $5.5bn off-market buyback.
“With $2.3bn of surplus franking credits, an off-market tender share buyback could significantly lower the price at which shares are bought back, as well as distributing surplus franking credits and potentially creating a significant tax capital loss for participating retail investors,” he said.
“History suggests the retail investors who overwhelmingly support structured tender buybacks would reinvest the proceeds back into CBA.”
Analysts polled by Bloomberg expect CBA to report a cash profit of $8.62bn for the 12 months ended June 30, with second-half net income printing at $4.69bn. The annual result would be up from a cash profit of almost $7.3bn in fiscal 2020.
The full-year dividend is tipped to come in at $3.427, including an already paid interim payment of $1.50. In 2020, dividend payments by CBA totalled $2.98 due to regulatory restrictions.
In December, the Australian Prudential Regulation Authority announced the removal of the latest restrictions that capped dividend payments by banks to 50 per cent of profit.
CBA late last month changed the accounting treatment for costs relating to implementing software-as-a-service arrangements, with analysts saying the change led to a small rise in historic and expected operating expenses.
Investors will get early clues to conditions in the banking and insurance sectors when bancassurer Suncorp delivers full-year earnings on Monday.
CBA’s major rivals are set to provide third-quarter updates over the next two weeks, beginning with NAB on Thursday, given they rule off their financial years on September 30. Bendigo and Adelaide Bank reports profits on August 16.
JPMorgan analysts are cautious about CBA, which is their least preferred stock among the majors.
“CBA is trading at a stretched headline valuation and a large price-to-earnings ratio premium to peers,” they said.
“Nonetheless, we believe it has a group of businesses that are strongly positioned.” CBA’s shares have gained 26.4 per cent this calendar year to close at $103.75 on Friday.
Macquarie Group banking analyst Victor German said the major banks – bar ANZ – were growing solidly in the mortgage market.
“The key exception is ANZ as its processing issues persist. While clearly negative for ANZ’s growth, anaemic balance sheet trends are likely to result in better margin performance,” he said.
Mr German warns of risks to banks due to the economic fallout linked to Covid-19 lockdowns.
“The key potential positives are volume growth and capital generation. In the near-term, with the macro tide turning, we see risk to the sector’s performance, albeit recognise relative valuation support and longer-term upside if inflation concerns remerge.”
The sector has revived the option of loan repayment pauses.
Australian Banking Association data released last week showed there were 14,683 residential mortgages and 615 business loans on repayment pauses and since July 8, across the big four and Bendigo Bank. There were 23,812 approvals for hardship assistance.
So far the numbers are well down on the pandemic peak last year, when almost 500,000 home loans and more than 225,000 business loans had repayments deferred.
The banks no longer have access to ultra-cheap funding under the RBA’s Term Funding Facility which was ruled off on June 30. On Friday, the RBA said the TFF had provided $188bn to eligible financial institutions, with most banks taking up the bulk of their allowance.
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