Sale of general insurance arm sets up Commonwealth Bank capital return

Doing it right beats doing it first but the two terms are becoming interchangeable at Commonwealth Bank, as Matt Comyn sets up his board to lead the major-bank sector with a capital management initiative at the August annual result.

Before the week is out, CBA will announce the sale of its general insurance unit – the last sizeable chunk in a divestment program that began in September 2017 with the $3.8bn sale of its life insurance business CommInsure to AIA Group.

The buyer of the general insurance division – whether it’s IAG, Allianz or QBE – is not the issue, at least from CBA’s perspective, and neither is local branding rights to the “simpler, better bank” strategy.

While used by Comyn, the banner was first hoisted by ANZ Bank boss Shayne Elliott.

The real point is that CBA rakes in more cash ($1bn or thereabouts), further increases its March common equity tier one ratio of 12.7 per cent, and the board’s confidence is heightened that the balance sheet is strong enough to start returning surplus capital.

Since the exit from CommInsure Life, the big lumps offloaded by CBA include Colonial First State Global Asset Management for $4.2bn; the 37.5 per cent BoComm Life stake for $668m; the 55 per cent interest in Colonial First State for $1.7bn, and the soon-to-be-announced exit from general insurance.

National Australia Bank crested the tape slightly ahead of CBA in terms of completed deals, after it started taking out the trash under previous CEO Andrew Thorburn.

NAB celebrated the end of the program in late May with the completion of the $1.4bn sale of MLC Wealth to IOOF. Since 2015, the bank has undertaken 18 divestments of various shapes and sizes, with the extraction and handover of MLC Wealth delivered “at pace” in only nine months, according to chief executive Ross McEwan.

ANZ is also well advanced – holdings in a sprinkling of unloved Asian associates are the only items remaining from a long list of non-core businesses identified by ­Elliott at the start of his term in January 2016.

The 24 per cent stake in Malaysian lender AmBank is a hard sell after it became embroiled in the 1MDB scandal, as are the 38 per cent stake in Panin Bank in Indonesia and the 12 per cent slice in China’s Bank of Tianjin.

Westpac, distracted through 2020 by board and management upheaval caused by its $1.3bn money-laundering settlement with Austrac, has lagged its three main domestic rivals in implementing the simpler, better bank strategy.

CBA is favoured to kickstart a bonanza in major-bank share buybacks by announcing a $5bn deal at its annual result.

On Morgan Stanley numbers, the big four are sitting on $19.5bn-$28bn of surplus capital, using a target CET1 ratio of 10.75-11.25 per cent.

Assuming an even more conservative target of 11.5 per cent, the surplus would be more than $15bn.

“We expect the banks to take a conservative approach to capital management in the near term given that Covid-related risks ­remain and the Australian Prudential Regulation Authority’s revisions to the capital framework are not yet finalised,” Morgan Stanley bank analyst Richard Wiles said.

Despite this, CBA was likely to unveil a $5bn buyback, with ANZ, NAB and Westpac likely to follow up with buybacks of $2.5bn, $4bn and $3.5bn respectively at their 2022 interim results.

The banks were expected to consider returning capital through off-market buybacks, as this allowed the distribution of surplus franking credits and could result in a slightly larger reduction in the number of shares for the same amount of capital.

The buybacks would reduce the banks’ shares on issue by 3-5 per cent.

Delinquencies rise

Home loan delinquencies have risen to their highest levels in ­select RMBS (residential mortgage-backed securities) trusts but analysts are unconcerned, blaming a combination of Covid-19 and the expected impact of amortisation.

Performance data was released late last week for two NAB trusts – the National RMBS Trust 2015-1 and the National RMBS Trust 2016-1.

In the former, delinquencies as a percentage of outstanding loan balances rose to a record 3.37 per cent in May, from 2.86 per cent a year ago.

A similar trend was evident in the 2016 transaction, where delinquencies climbed to 2.79 per cent in May, from 1.68 per cent in 2020.

No one likes to see arrears steadily increasing, but Standard & Poor’s senior director Narelle Coneybeare says delinquencies move around depending on the size of the mortgage pool.

Both National trusts are in the older vintage, and as the pools get smaller as borrowers pay off their loans or sell their houses, those under financial pressure tend to remain.

For example, the outstanding balance at the time of issuance for the 2015 deal was $1.7bn, but it’s now contracted to $362m, and similarly for the 2016 deal, with the pool down from almost $2bn to $562m.

Another factor has been hardship cases caused by borrowers coming off the JobKeeper program.

However, this has been largely offset by the strength of the economic recovery.

Borrowers have also taken advantage of lower interest rates to make additional repayments and reverse prior arrears positions.

The downside is that arrears are expected to increase in the second half of the year as borrowers coming off deferral programs struggle to consistently keep up with their repayments.

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