Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

Commonwealth Bank of Australia / Equity Bottom-Up

<ul>
<li>CBA reported modestly weaker FY 1H22 cash results from continuing operations of AUD 30.5 bn, which attributed primarily to a 77.1% decline in loss provision reversals; </li>
<li>Despite the poor result, CBA has chosen to pull on numerous earnings levers to make even these numbers; and </li>
<li>While credit has improved, reserves will need to be buttressed as we head into a period of higher interest rates.   </li>
</ul>


CBA reported modestly weaker FY 1H22 cash results from continuing operations of AUD 30.5 bn, which attributed primarily to a 77.1% decline in loss provision reversals; 
Despite the poor result, CBA has chosen to pull on numerous earnings levers to make even these numbers; and 
While credit has improved, reserves will need to be buttressed as we head into a period of higher interest rates.   


Commonwealth Bank of Australia – Pulling On All Earnings Levers

<ul>
<li>
Axis Bank (AXSB.IN) [Axis] has become the frontrunner to purchase Citigroup’s (C.US) India [Citi India] consumer business; </li>
<li>The Citi India transaction would represent a negative adjusted net spread of 41 bp for Axis – intimating a negative return on investment of 1.0%; and </li>
<li>As many customers have hit the exit button, we have already witnessed Citi India's retail loan portfolio decline 6.7% YOY prior to FY 2022 COVID-19 protocols. </li>
</ul>



Axis Bank (AXSB.IN) [Axis] has become the frontrunner to purchase Citigroup’s (C.US) India [Citi India] consumer business; 
The Citi India transaction would represent a negative adjusted net spread of 41 bp for Axis – intimating a negative return on investment of 1.0%; and 
As many customers have hit the exit button, we have already witnessed Citi India's retail loan portfolio decline 6.7% YOY prior to FY 2022 COVID-19 protocols. 


<ul>
<li>Weaker Result Across Almost All Geographic Segments - Led By Negative Jaws;    </li>
<li>Credit Modestly Weaker, Although Reserve Coverage Remains Strong. Watch For Credit Turn; and </li>
<li>Progress On Asian Consumer Exits, But Sea Change In View On Mexico.   </li>
</ul>


Weaker Result Across Almost All Geographic Segments - Led By Negative Jaws;    
Credit Modestly Weaker, Although Reserve Coverage Remains Strong. Watch For Credit Turn; and 
Progress On Asian Consumer Exits, But Sea Change In View On Mexico.   


Citigroup – Many Moving Parts and Confused Mexican Exit

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<ul>
<li>As expected, S&amp;P DJI have announced that <a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a>'s weight in the S&amp;P/ASX indices will be increased all at once at the close of trading on 28 January. </li>
<li>We estimated passive S&amp;P/ASX trackers will need to buy over A$4bn of <a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> leading to a funding sell of that size on the other index constituents.</li>
<li>
<a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> has risen 25% from its lows in November. We expect most UK shareholders have finished selling shares and the one-shot inclusion could take the stock higher.</li>
</ul>


As expected, S&amp;P DJI have announced that BHP Group (BHP AU)'s weight in the S&amp;P/ASX indices will be increased all at once at the close of trading on 28 January. 
We estimated passive S&amp;P/ASX trackers will need to buy over A$4bn of BHP Group (BHP AU) leading to a funding sell of that size on the other index constituents.

BHP Group (BHP AU) has risen 25% from its lows in November. We expect most UK shareholders have finished selling shares and the one-shot inclusion could take the stock higher.


BHP Unification - ASX Upweight in One Shot

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Commonwealth Bank of Australia / Event-Driven

In <a href="https://www.smartkarma.com/insights/aussie-bank-buyback-season-starts-expect-a-12-15bn-and-funky-flows" target="_blank" data-smartkarma-citation="insights:55301" rel="noopener">Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows</a> 10 days ago I wrote that I expected <a href="https://www.smartkarma.com/entities/commonwealth-bank-of-australia" target="_blank" data-smartkarma-citation="entities:14:1" rel="noopener">Commonwealth Bank of Australia (CBA AU)</a> to announce an off-market buyback A$5.0-6.0bn when it announced earnings on 11 August.<div class="content-highlight">
11 Aug 2021: CBA releases earnings
<ul>
<li>In its Q3 update <a href="https://www.asx.com.au/asxpdf/20210512/pdf/44wdznw579z8cv.pdf" target="_blank" rel="noopener">released</a> on 12 May, <a href="https://www.smartkarma.com/entities/commonwealth-bank-of-australia" target="_blank" data-smartkarma-citation="entities:14:1" rel="noopener">Commonwealth Bank of Australia (CBA AU)</a> announced a CET1 ratio of 12.7%.</li>
<li>In April CBA issued PERL capital notes to the tune of A$1.18bn which raised Tier1 by 26bp, and sold its Comminsure business which will also raise it slightly in CY21H2. It sold its wealth management business earlier. Given earnings are expected to be robust and more writebacks from provisions made last year could be in the offing, what was an excess capital position of A$10-11.5bn at end-March could be on the order of A$12.0-13.5bn at end-June.</li>
<li>Given the change in CBA's profile from multi-strat bank to more of a deposit-taking institution, and the notion it could get the second part (A$500mm) of the $1bn capital penalty APRA applied in 2019 (following a review of its governance, culture and accountability) following remediation, there is likely to be more flexibility to lower the CET1 ratio.</li>
<li>The 12 May statement said "A strong surplus capital position creates flexibility for the board in its consideration of capital management initiatives. The timing and extent of any such initiatives is dependent upon a continued trend of domestic economic improvement, our ongoing assessment of portfolio credit quality, and regulatory guidance."
</li>
<li>CBA should be expected to be able to raise its dividend AND buy back shares. I would expect a buyback of A$5.0-6.0bn or about half the distance between its end-June CET1 and the "Unquestionably Strong" level.</li>
<li>Given CBA's franking credit position, and its history of having conducted off-market buybacks in the past, one should expect CBA's buyback to be an off-market buyback. </li>
</ul>
</div><h3></h3><h2>Today's News</h2>This morning, Commonwealth Bank of Australia released its FY2021 Full Year Earnings (<a href="https://www.commbank.com.au/content/dam/commbank-assets/investors/docs/results/fy21/cba-fy21-profit-announcement.pdf" target="_blank" rel="noopener">statement</a>, <a href="https://www.commbank.com.au/content/dam/commbank-assets/investors/docs/results/fy21/cba-fy21-results-presentation.pdf" target="_blank" rel="noopener">presentation</a>, <a href="https://www.commbank.com.au/content/dam/commbank-assets/investors/docs/results/fy21/cba-fy21-basel-iii-pillar-3-disclosure.pdf" target="_blank" rel="noopener">capital adequacy</a>, and there is, of course, a <a href="https://edge.media-server.com/mmc/p/jwtuzfqm" target="_blank" rel="noopener">webcast</a>, which goes along with the <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">Annual Report</a>, <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">Corporate Governance Statement</a>, and an update on the <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">Prudential Inquiry Remedial Action Plan</a>).  As expected, results were good. Statutory NPAT up 19.7%yoy, mostly due to lower loan impairments. Operating profit was up 1.7%. NIM was down slightly to 2.03% due to higher quality assets and CET1 capital came in at 13.1%.And as expected, the final dividend was hiked - A$2.00/share for Record Date 18 August - and a <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">large off-market buyback was announced</a>. <h3>A$6.0bn. </h3>Also with a Record Date of 18 August. This insight talks about how the flows, and the possibilities. It is a follow-on from <a href="https://www.smartkarma.com/insights/aussie-bank-buyback-season-starts-expect-a-12-15bn-and-funky-flows" target="_blank" data-smartkarma-citation="insights:55301" rel="noopener">Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows</a>. One should expect <a href="https://www.smartkarma.com/entities/westpac-banking-corp" target="_blank" data-smartkarma-citation="entities:444:1" rel="noopener">Westpac Banking (WBC AU)</a> to announce an off-market buyback when it reports on 19 August. There are two bits of more recent news which impact this. I had expected A$3.0bn or more. I might expect A$4.0bn but there is a wee cloud there.

In Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows 10 days ago I wrote that I expected Commonwealth Bank of Australia (CBA AU) to announce an off-market buyback A$5.0-6.0bn when it announced earnings on 11 August.
11 Aug 2021: CBA releases earnings

In its Q3 update released on 12 May, Commonwealth Bank of Australia (CBA AU) announced a CET1 ratio of 12.7%.
In April CBA issued PERL capital notes to the tune of A$1.18bn which raised Tier1 by 26bp, and sold its Comminsure business which will also raise it slightly in CY21H2. It sold its wealth management business earlier. Given earnings are expected to be robust and more writebacks from provisions made last year could be in the offing, what was an excess capital position of A$10-11.5bn at end-March could be on the order of A$12.0-13.5bn at end-June.
Given the change in CBA's profile from multi-strat bank to more of a deposit-taking institution, and the notion it could get the second part (A$500mm) of the $1bn capital penalty APRA applied in 2019 (following a review of its governance, culture and accountability) following remediation, there is likely to be more flexibility to lower the CET1 ratio.
The 12 May statement said "A strong surplus capital position creates flexibility for the board in its consideration of capital management initiatives. The timing and extent of any such initiatives is dependent upon a continued trend of domestic economic improvement, our ongoing assessment of portfolio credit quality, and regulatory guidance."

CBA should be expected to be able to raise its dividend AND buy back shares. I would expect a buyback of A$5.0-6.0bn or about half the distance between its end-June CET1 and the "Unquestionably Strong" level.
Given CBA's franking credit position, and its history of having conducted off-market buybacks in the past, one should expect CBA's buyback to be an off-market buyback. 

Today's NewsThis morning, Commonwealth Bank of Australia released its FY2021 Full Year Earnings (statement, presentation, capital adequacy, and there is, of course, a webcast, which goes along with the Annual Report, Corporate Governance Statement, and an update on the Prudential Inquiry Remedial Action Plan).  As expected, results were good. Statutory NPAT up 19.7%yoy, mostly due to lower loan impairments. Operating profit was up 1.7%. NIM was down slightly to 2.03% due to higher quality assets and CET1 capital came in at 13.1%.And as expected, the final dividend was hiked - A$2.00/share for Record Date 18 August - and a large off-market buyback was announced. A$6.0bn. Also with a Record Date of 18 August. This insight talks about how the flows, and the possibilities. It is a follow-on from Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows. One should expect Westpac Banking (WBC AU) to announce an off-market buyback when it reports on 19 August. There are two bits of more recent news which impact this. I had expected A$3.0bn or more. I might expect A$4.0bn but there is a wee cloud there.

CBA Announces a BIG Off-Market Buyback - Timing and Past Cases

Australia

National Australia Bank Limited is an international banking group which operates in Australia, New Zealand, Europe, Asia and the United States.  The Group offers banking services, credit and access card facilities, leasing, housing and general finance, international and investment banking, wealth and funds management, life insurance and custodian, trustee and nominee services.

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National Australia Bank (NAB AU)

Commonwealth Bank of Australia – Pulling On All Earnings Levers

CBA: CBA reported modestly weaker FY 1H22 cash result, attributed primarily to a 77.1% decline in provision reversals. Despite the result, CBA did...

Thomas J. Monaco

Axis Bank – Lost In The Citi

AXIS: Axis has become the frontrunner to purchase Citi India's consumer business. This deal would result in a negative ROI of 1.0% to Axis.

Thomas J. Monaco

Citigroup – Many Moving Parts and Confused Mexican Exit

CITI: Weaker results across almost all geographic segments. Credit is modesty weaker but coverage is strong. Progress on Asian consumer exits, but...

Thomas J. Monaco

BHP Unification - ASX Upweight in One Shot

The BHP upweight in the ASX indices will be done all at once at the close on 28 January. This will mean A$4bn of BHP to buy and a funding sell on...

Brian Freitas

CBA Announces a BIG Off-Market Buyback - Timing and Past Cases

Commonwealth Bank of Australia today announced a BIG off-market buyback of A$6bn - at the upper end of my expected range. This deal will have super...

Travis Lundy

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