CBA to report $8.70bn profit next week: Should announce a $5bn buyback

  • By Elizabeth Fry

The re-emergence of covid lockdowns has presented a conundrum for the prudential regulator and the bank boards, according to Citi’s banking analyst Brendan Sproules. 

An unambiguous Covid recovery by the banking sector over the last six months has seen the market warmly anticipate a substantial capital return to supplement future earnings and dividend growth, he said in client note. 

However, he wrote, after six months of successful recovery from the pandemic, the uncertainty surrounding the latest Sydney lockdown has the potential to derail the sector’s capital return plans to drive future earnings growth. 

“The re-emergence of Covid lockdowns and resumption of loan deferrals has ‘muddied the waters’ for APRA and bank boards,” he said, noting that ANZ jumped its peers with a hastily arranged on-market buyback announcement while National Australia Bank has subsequently followed suit with a $2.5 billion announcement. 

Like his peers, Sproules expects the Commonwealth Bank to announce a $5 billion off-market buyback when it reports its annual profit of around $8.70 billion on 11 August. “We believe a rational entertainment of the current facts – excess liquidity, excess capital, strong asset quality – coupled with the known experiences of last year’s lockdown, would make a case for capital management to prevail.  

“This argument would be bolstered by the fact that a vaccine on the horizon provides an end in sight to Sydney’s lockdown, regardless of whether zero cases can be achieved or not.” 

Significant surplus capital 

Australia’s biggest bank had significant excess capital at the beginning of the pandemic thanks to the $4 billion sale of CFSGAM to Mitsubishi, he noted  

However, Sproules argued that rationality may come unstuck with politics and optics, and hence he can’t rule out the possibility of a more modest buyback (for now), in the vicinity of $2 billion. 

Also, he continued, while CBA should announce a $5 billion buyback in coming weeks, the reality is that whether it is $2 billion or $5 billion has little bearing in the long run as it reflects timing differences. 

Sproules expects the lender’s revenue growth to rise 2.6 percent on the year earlier on growing loan volumes, with cost growth a2.5 percent to be broadly similar.  

The analyst forecast Bendigo and Adelaide Bank to post a $451 million profit on 16 August. 

“We are expecting Bendigo’s revenue growth to accelerate to 5.5 percent year on year driven by very strong 12.5 percent housing loan growth.