Commonwealth Bank of Australia (CBA.AX), the country’s largest lender, said on Wednesday it will return a record $7 billion to investors in buybacks and dividends as an economic rebound from the pandemic pushed its annual cash profit up almost a fifth.
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“The pandemic continues to have an impact on the Australian economy, as well as the health of our communities,” Chief Executive Matt Comyn said.
“(But) we are still optimistic about the Australian economic recovery and prospects… we do believe that there will be strong economic growth in calendar 2022.”
With A$11.5 billion in excess capital, mostly built through divestments such as its asset management and general insurance units, CBA feels it has plenty of capacity to return a portion of that through a record A$6 billion share buyback and still be able to absorb potential stress.
CBA, which doubled its dividend to A$2.00 per share from 98 Australian cents last year, is the latest of the country’s cash-jammed Big Four banks to approve multi-billion capital returns to shareholders, and analysts expect more in the next two years. read more
With 1.7 million shares on issue, the dividend payment would add up to about A$3.5 billion, and including its interim payment of A$1.5 per share, the bank’s payout ratio sits at 71% of its yearly cash earnings, it said.
“While we do see the bank has a very strong cash flow generating business, and they do give out a lot of that cash flow as dividends, the question is then, are they going to be able to grow that dividend? Grow those earnings?” said Max Cappetta, chief portfolio manager at Redpoint Investment Management, a CBA investor.
CBA’s buyback offer will be at a discount in the range of 10%-14% to the market price, and will reduce the share count by more than 3.5%. This will result in higher key profitability metrics such as return on equity, earnings per share and dividend per share.
CBA shares rose 2.3% to a record high of A$109.03 in early trading before settling down to close 1.51% higher.
MORE HEADWINDS THAN TAILWINDS
Comyn acknowledged the strength of Australia’s economic recovery over fiscal 2021, but said the continuing pandemic and lower interest rates would pressure the bank’s future earnings.
“We’re constantly evaluating the revenue situation. I mean the volume growth has been very strong this year, but in the near term yes, net interest margins will continue to be under pressure and we’re going to try and manage that as best we can.”
The lender, which follows a different reporting calendar than its rivals, said cash net profit after tax rose 19.8% to A$8.65 billion in the year ended June 30, beating an average estimate of A$8.55 billion from five analysts.
That was mainly due to lower loan impairment charges, which fell to A$554 million from A$2.52 billion last year.
Expenses, however, rose 3.3% to A$11.36 billion, higher than most analysts expected, driven by remediation charges and higher wages – the bank is recruiting 600 engineers in Australia and has opened an office in India.
Meanwhile operating income rose only 1.7% to A$24.1 billion, as it warned there would be “more headwinds that tailwinds” ahead.
“Investors will receive the capital return announcement well, but will be starting to ask at what point is it priced in,” Citigroup banking analyst Brendan Sproules said.
“Despite an overall in-line result, the revenue outlook appears more challenged than our expectations.”
($1 = 1.3611 Australian dollars)