Commonwealth Bank of Australia (ASX: CBA), Australia's biggest bank, recently announced a huge share buy-back.
The big four ASX bank is going to conduct an off-market buy-back of up to $6 billion of CBA shares.
Is this decision a sign that the bank doesn't have much growth potential right now?
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What was the justification for the buy-back?
CBA Chair Catherine Livingstone said:
CBA's strong capital position and our progress on executing our strategy mean that we are well placed to continue to support our customers and manage ongoing uncertainties, while also returning a portion of surplus capital to shareholders. After careful consideration, your board has determined that the buy-back is the most efficient and value-enhancing strategy to distribute CBA's surplus capital and franking credits.
The CBA CEO Matt Comyn said:
The buy-back follows CBA's continued strong operating performance and the completion of various divestments. After the buy-back, CBA will continue to have a strong surplus capital position to support our customers.
In terms of the CBA share price for the buy-back, there will be a tender process
The bank also noted the resilience of the domestic economy, its capacity to absorb potential stress events after completing the buy-back and the capital generated from strategic divestment as reasons for the buy-back.
Since the first half of FY19, CBA has generated $6.2 billion of excess capital from divestments.
This came after the bank generated $8.65 billion of cash net profit after tax (NPAT) – up 19.8% in FY21. It finished FY21 with a CET1 capital ratio of 13.1% (an increase of 150 basis points). The board grew its dividend by 52 cents to $3.50 per share.
Limited growth options for CBA?
Businesses have three main options when it comes to capital. They can use it to re-invest for growth (organic or acquisitions), improve the strength of the balance sheet (such as paying off debt) or pay shareholder returns (dividends and buybacks).
Boards need to assess what the best option to do is on behalf of shareholders.
CBA is already so large that there isn't much that can significantly move the dial. It is already the biggest bank in Australia. In FY21 its operating income was $24.16 billion, an increase of just 1.7% on FY20. That was despite "strong" volume growth – both its home lending and household deposits increased by $31 billion, which were both 1.2x the system. Business lending growth was $11 billion, more than 3x the system.
CBA said it will continue to invest in its business to reinforce its product offering to retail and business customers, and extend its digital leadership.
The bank will continue to target a full year dividend payout ratio of 70% to 80% of cash net profit.
The Age reported that Omkar Joshi, a portfolio manager from Opal Capital Management, said the round of buy-backs from banks reflects a lack of compelling growth opportunities. He said:
It's very much a reflection of the fact there is not much growth outside of mortgages.
But Mr Joshi went on to say that it wasn't really a problem because institutional investors don't expect large growth plans from the big four banks. It would be better for banks to focus on their core strengths in mortgages and business banking rather than try to pursue something like offshore banking.
