Why CBA will get a $2.4 billion cash injection in FY20


The Commonwealth Bank of Australia (ASX: CBA) will receive $750 million before the end of 2019 and a further $1.63 billion before the end of June next year after it struck further agreements to sell is insurance arm, CommInsure Life.

The CBA share price didn’t react to the news as the deal has long been flagged although our largest listed bank conceded that the total aggregated proceeds from the divestment will be $150 million short of previous estimates.

The progression is still good news given the trouble AMP Limited (ASX: AMP) had in selling its life insurance business.

Cash payments to fall into CBA’s lap by Christmas

At least CBA shareholders can have a little more comfort around the nearer-term sustainability of the bank’s generous dividend, which is about the only reason why anyone would want to hold the stock.

The bank said that it will enter into a joint-cooperation agreement with AIA that will result in the latter taking over the full economic interest in CommInsure, apart from CBA’s equity stake in Chinese insurer BoCommLife.

Once this agreement is executed before the end of 1HFY20, CBA will receive an upfront payment of $500 million.

The bank will get a further $250 million top-up in the current half from one of the four partnership milestone payments and from Colonia Mutual Life Assurance, which will sign a reinsurance deal with AIA after the handover.

CET1 ratio to rise

Once the sale is completed (it’s still subject to foreign regulatory approval), the cash injection will lift CBA’s Common Equity Tier-1 (CET1) ratio by approximately 35 to 40 basis points, or $1.6 billion to $1.8 billion.

Commonwealth Bank said it’s still committed to selling BoCommLife even though it isn’t part of the AIA deal. The bank has a 37.5% equity stake in the Chinese group and MS&AD Insurance Group Holdings has put its hand up to buy over the stake.

However, CBA needs to get the green light from the China Banking and Insurance Regulatory Commission (CBIRC) for the deal to proceed. The bank said it’s working constructively with CBIRC but didn’t provide a timeframe for when the sale could be completed.

The good news for shareholders is that the sale of CommInsure to AIA isn’t affected by the BoCommLife transaction.

The CBA share price is trading 0.2% lower at $76.93 in morning trade, while the National Australia Bank Ltd. (ASX: NAB) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and Westpac Banking Corp (ASX: WBC) share price are also trading in the red.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited and Commonwealth Bank of Australia. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of National Australia Bank Limited. 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



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