Shareholders hoping for capital returns from Commonwealth Bank of Australia (ASX: CBA) shouldn’t hold their breath as our largest ASX listed bank has put asset sales on the backburner.
The CBA share price has outperformed the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index over the past month with a 3.5% gain compared to a less than 2% rise in the stock benchmark.
This is due in part to hope that the bank will announce a share buyback or some other capital return program later this year that would be funded through the sale of its wealth management and mortgage broking business following the successful $4.1 billion divestment of Colonial First State Global Asset Management business to Mitsubishi UFJ in October last year.
Divestments put on hold
The bank said this morning that it would deprioritise asset sales as it focuses on implementing the recommendations of the Hayne Royal Commission, refunding customers for its past misdeeds and fixing past issues.
The news won’t come as a surprise to some though as there have been mounting speculation that CBA would struggle to off-load these assets, according to the Australian Financial Review.
Some experts believed that CBA won’t get the price it wants from a sale due to the lack of scale in the businesses and the value erosion from the Royal Commission’s recommendations, which included the banning of trailing commissions.
Is there a Silver-lining?
The silver-lining is that the value of CBA’s mortgage broking division (Aussie Homeloans) has probably gotten a boost as the Federal Government made a back-flip in supporting this change after intense lobbing from the mortgage broking industry.
Listed mortgage brokers like the Mortgage Choice Limited (MOC) share price and Yellow Brick Road Holdings Ltd (ASX: YBR) share price have gotten a big boost on the news.
CBA has paid or provisioned $1.46 billion to address the issues uncovered by the Royal Commission with 83% of the amount relating to its wealth management division.
CBA and Australia and New Zealand Banking Group (ASX: ANZ) were seen as the two banks most likely to launch new capital return initiatives this year but this looks increasingly unlikely (or at the very least be scaled back).
A proposal by the Reserve Bank of New Zealand to lift the capital adequacy ratios of financial institutions operating in that market will divert more capital away from shareholders.
It’s also likely that big banks like CBA will have to cough up more cash as they face multiple class action lawsuits from aggrieved shareholders and customers.
I would remain underweight on the sector for now.
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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Commonwealth Bank of Australia. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019