Is a buyback on the cards for CBA?

The sale of Commonwealth Bank’s life insurance business and a possible IPO of its global asset management business have been widely applauded even though both had been well telegraphed.

CBA announced the sale of its life insurance businesses in Australia and New Zealand - CommInsure Life and Sovereign - for $3.8 billion to AIA last week and is reviewing the future of Colonial First State Global Asset Management.

“We see this as a rational strategic decision by CBA which should enable it to be more focused on its core banking businesses," said UBS analyst Jon Mott.

Yet, according to the analyst, the financial impact is largely immaterial since these operations contributed 2 per cent of cash earnings in 2017. CBA will retain its general insurance and wealth management distribution operations.

'Ongoing distraction'

Mott reckons CBA will return this capital via a buyback during 2019. This leads to some small earnings per share downgrade of -0.4 per cent in 2019 - due to timing of buyback - and +0.5 per cent accretion in 2020.

“Return on equity will rise by 0.5 per cent however this is largely offset by a fall in book value per share," he said.

“We continue to see CBA as one of the world's premium banking franchises. However, we believe the money laundering allegations and upcoming change in chief executive are likely to be an ongoing distraction.

"As a result, despite its business momentum and its share price correction, we believe it will be challenging for CBA to outperform.”

But according to Morgan Stanley analyst Richard Wiles, a buyback is unlikely for three very good reasons.

Three good reasons

Firstly, he argued, there is potential for conduct-related penalties and additional APRA oversight following the AUSTRAC allegations.

Second, there will likely be increases in mortgage risk weightings and the capital intensity of future growth following the release of banking regulator's discussion paper later this year.

And third, Wiles added, the CBA will take a conservative balance sheet approach given the "environment of heightened risk" in the mortgage market and the prospect of further management and board changes in 2018.

“We view CBA's sale of its life insurance operations in Australia and New Zealand as a small positive because manufacturing Life is not a core business for banks and white labelling reduces earnings volatility and the potential for future conduct issues."

Further, he added, CBA Life's 2019 return on net tangible assets of 11.5 per cent is well below the group figure of 17 per cent.

The CommInsure sale releases 70 basis points of capital eliminating the pro-forma deficit to APRA's 10.5 per cent common equity tier one capital target. 

The analyst called the $3.8 billion satisfactory and calculated a price tag of anywhere between $3 billion and $4.5 billion for Colonial First State based on valuations of Australian listed asset management peers and his own earnings forecasts.

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