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CBA DRP Raises Dilution Concerns

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Some weak-minded analysts don’t like it, but the Commonwealth Bank is determined to add to the list of goodies delivered to shareholders yesterday with a record final and full year dividend by re-opening its dividend reinvestment plan (DRP).

The bank says it will aim to a raise up to $1.4 billion in new capital through the plan which will carrying a discount of 1.5% to the price of the shares over five day period. Several analysts have questioned the re-opening wondering if it will be “dilutive”.

The Bank’s CEO, Ian Narev made clear in a briefing yesterday the issue will go ahead and it will boost capital by 0.20% as the bank seeks to lift its tier one capital from the current 10.1% to the new level demanded by APRA of 10.5%.

With a total of $8.8 billion in dividends to be paid to shareholders for 2016-17, the $1.4 billion doesn’t seem very much, but it will allow the bank to take advantage of the appetite for CBA shares by investors of all sizes. The big banks normally ‘neutralise’ the shares they issue under active DRPs by buying back the same number of issues as issued.

But the final of $2.30 a share is 53.6% of the total payout, or $4.717 billion, so the $1.4 billion is a more substantial 33% of that figure, meaning the impact will be much quicker than running the DRP over a year. The bank did not say if the DRP would operate for the interim next February.

The bank says that besides the contribution from the DRP, it can find the rest of the capital boost needed by growing its balance sheet and generating more funds surplus to requirements as profits as higher interest rates for investor loans which were raised in April through June kick in for a full year.

It could also hold the interim steady at $1.99 a share and achieve the rest of the improvement. And at the same time the bank’s funding costs are slowly easing (in spite of credit ratings being cut or put on a negative outlook).

And then there’s the money making machine that the bank has become’ The data release yesterday shows clearly how the CBA like its peers) is one of the most profitable businesses in Australia. The bank earned just on $10 billion in net profit in the year to June or a net margin of 22%.The return on equity was a massive 16%, one of the highest in the world, down from 16.5% last year.

But the best measure of how much money the CBA (and other banks are raking in) is the measure of the percentage its “operating income” is of total revenue for the year.

In the year to June the CBA reported total operating income of $26.005 billion and revenue of $44.95 billion - which gives a gross profit margin on 57.8% (which is almost as good as the fabulous iron ore mines of BHP and Rio Tinto in the Pilbara).

That was up from the 55.7% share in 2015-16. So much for all the rubbish from the banks, their mouthpiece (the Australian Bankers Association) and the various media shills about how strong profitable banks are essential.

They CBA, Westpac, ANZ and NAB are not just profitable, strong banks, and part of an oligopoly that treats the rest of the country poorly. Just look at the long list of fines and dodgy practices exposed in the past decade, starting with Storm Financial at the CBA (and Macquarie) back in 2008.

The CBA’s banking income grew 4.3% because of “volume growth in home lending, business lending and deposits - thereby making a mockery of many gloomy analysts and business media who had forecast growing pressure on bank costs and profits from the rack down on interest only (to investor) lending and the impact of higher capital rules from APRA for home lending.

The Federal Government’s bank levy will trim the bank’s earnings ($258 million post tax, according to the bank yesterday), but this result shows how easy it will be to cover the cost, and the impact of the one in South Australia.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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