Commonwealth Bank to bed down asset sales before splashing cash

CBA chief executive Matt Comyn. Britta Campion / The Australian

A market divorced from fundamentals? Say it ain’t so!

Over the last few months, a puff of speculative wind has inflated Commonwealth Bank’s value to an extraordinary, 17.4 times forecast 2020 earnings — a record for any large, developed-market lender worth more than $US100 billion, according to UBS bank watcher Jon Mott.

However, the expectation that CBA will transform the speculation into substance by announcing a capital return at Wednesday’s full-year result is wide of the mark.

The word on the street is that chief executive Matt Comyn will update investors on a slate of planned asset sales, following Friday’s completion of the $4.2 billion exit from Colonial First State Global Asset Management.

The CFSGAM deal, struck at an eye-popping 19.4 times cash earnings, means that a buyback is officially on the radar.

Directors, though, will wait for the completed placard to be hoisted above “announced” transactions, such as the sale of BoComm Life.

The BoComm Life deal is the final condition precedent for the sale of CommInsure Life and is subject to Chinese regulatory approval.

There’s also the thorny issue of the Reserve Bank of New Zealand’s capital proposals, which CBA has said could result in an additional tier one capital requirement of about $NZ3 billion ($2.9bn).

The bank’s common equity tier one capital at the end of March was 10.3 per cent — comfortably within range of the prudential regulator’s 10.5 per cent target.

CBA said in its third quarter trading update in May that announced asset sales would add a further 120 basis points to its CET1 ratio.

Clearly there is some surplus capital to play with, but the extent of it is still uncertain.

That’s why it makes sense for the board to hold off making any announcement, at least until the first half of the 2020 financial year.

CBA is likely to reverse some of its recent gains on Wednesday if the delay is confirmed.

Over the last six months, the bank’s total shareholder return (share price growth plus reinvested dividends) is an attractive 19.5 per cent.

Even then it hasn’t led the major-bank sector.

That honour goes to beleaguered National Australia Bank, which has rallied in response to the appointment of Royal Bank of Scotland boss Ross McEwan as its new chief executive.

NAB’s six-month TSR is 21.2 per cent.

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