Cut to dividend on horizon for Commonwealth Bank investors

CBA’s asset divestment program will see it grapple with an “earnings hole” and may force the lender to cut its dividend.

A Commonwealth Bank branch in Brisbane. Pic Annette Dew

Commonwealth Bank’s asset divestment program will see it grapple with an “earnings hole” and may force the nation’s largest home lender to cut its dividend.

That’s the view of Morgan Stanley analysts led by Richard Wiles, who lowered their 2020 CBA cash profit estimate by about 2 per cent yesterday, after taking into account the $4 billion-plus sale of its global asset management unit.

“This transaction increases the emerging earnings hole in the near-term and we have downgraded fiscal year 2020 estimates cash profit,” Mr Wiles said.

“We stay underweight given pressure on retail bank profitability, a deteriorating outlook for housing, an ongoing reinvestment and compliance burden, an emerging earnings hole from asset sales, limited margin for error on loan losses and full absolute and relative trading multiples.”

$73.05 Commonwealth Bank closed down 18¢

On dividends, Morgan Stanley ponders three scenarios for shareholders following a proposed spin-off of CBA’s financial planning and mortgage broking units into a separate ASX entity.

The first scenario sees CBA deliver a flat dividend and its payout ratio climb to 84 per cent, while the second tips a flat dividend when combining the bank’s dividend with the new entity’s payment.

The third scenario, which would be controversial for investors, is a flat CBA dividend payout ratio that leads to a 7.5 per cent dividend cut in 2020, or a 4.5 per cent reduction if dividends from the demerged group are included.

Mr Wiles believes, though, divestments of Colonial First State Global Asset Management, CBA’s life insurance division and the spun-off businesses will see excess capital returned to investors through a special dividend or buybacks.

“We forecast the CET1 (Common Equity Tier 1) ratio to increase to circa 11.7 per cent once announced asset sales are completed. This means CBA will have excess capital of about $3.4bn above a conservative CET1 ratio of 11 per cent.”

Morgan Stanley said CBA could undertake a $3.5bn share buyback in fiscal 2020, or opt for a smaller $1.5bn buyback and an 85c fully-franked special dividend this year before another buyback in 2020. That would allow the bank to get in ahead of proposed changes by the Labor Party to the treatment of franking credits.

“The inclusion of a buyback in our model ensures an earnings-per-share neutral outcome in our fiscal 2021 estimate.”

CBA’s accounts for the year ended June 30, 2018, saw the bank’s total dividend print at $4.31 a share.

The payout ratio, after taking into account a mammoth $700 million penalty to Austrac, was 75 per cent.

The bank last week disclosed a non-cash profit hit of $169m in its first half, following its decision to offload several divisions.

Mr Wiles valued the soon-to-be demerged CBA financial planning and mortgage broking businesses at between $2.1bn and $3.2bn, equating to $1.19 to $1.80 a share.

Over at Bell Potter, analyst TS Lim expects CBA to report next month an interim statutory net profit of $4.81bn and cash profit from continuing operations of $4.77bn.

“We expect CBA’s first quarter 2019 momentum to be maintained in the second quarter and with the bank still making good progress in simplifying its overall business,” Mr Lim said .

He added that the forecasts imply a cash net profit of $2.5bn in the second quarter of 2019, underpinned by stable operating income, ongoing cost discipline and stable credit quality, sound overall portfolio credit quality, ongoing institutional banking portfolio optimisation and seasonally lower consumer arrears in the first quarter of 2019.