How a share buy back will boost your eps and meet your shareholders expectations
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How a share buy-back will boost your EPS and meet your shareholders’ expectations. John te Wechel Head of Group Funding Commonwealth Bank of Australia. Disclaimer.

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How a share buy back will boost your eps and meet your shareholders expectations l.jpg

How a share buy-back will boost your EPS and meet your shareholders’ expectations

John te Wechel

Head of Group Funding

Commonwealth Bank of Australia


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Disclaimer shareholders’ expectations

The material that follows is a presentation of general background information about the Bank’s activities current at the date of the presentation, 24 July 2001. It is information given in summary form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice when deciding if an investment is appropriate.


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Speaker’s Notes shareholders’ expectations

  • Speaker’s notes for this presentation are attached below each slide.

  • To access them, you may need to save the slides in PowerPoint and view/print in “notes view.”


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AGENDA shareholders’ expectations

  • How much capital?

  • Capital Structure

  • Cost of capital

  • Adding Value for Shareholders


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How much capital? shareholders’ expectations

  • Shareholder expectations

  • Regulators

  • Credit rating agencies

  • The market

  • Economic Equity


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Shareholder expectations shareholders’ expectations

  • CBA share register

  • Retail versus institutional investors

  • CBA dividend policy


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Beneficial Shareholders by Domicile* shareholders’ expectations

* % of total shares on issue as at May 2001


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Retail shareholders’ expectations

Place high value on franking credits

Prefer a high pay-out ratio

Personal investors highest tax rate on revenue income close to 50%

Change in capital gains tax rates may not yet be fully understood

Wholesale

More likely to balance value of franking credits against other forms of return

Payout ratio only one amongst many factors

Super funds pay 15% tax rate

Overseas investors incur witholding tax on unfranked dividends (may prefer capital growth to unfranked dividends)

Retail versus Institutional investors


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Regulatory Capital shareholders’ expectations

  • Tier 1 capital

  • Total regulatory capital

  • Capital treatment of investment in life insurance and funds management businesses

  • New Basle Accord


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Tier 1 Capital shareholders’ expectations

30 Jun 00 31 Dec 00

Tier One Capital

Total Shareholders’ Equity 18,435 19,461

Eligible Loan Capital 418 423

Total Shareholders’ Equity and Loan Capital 18,853 19,884

Less Goodwill (5,905) (6,007)

Less Preference shares (86) (39)

Less Intangible component

of investment in

non-consolidated subsidiaries (2,656) (3,449)

Less Outside equity interests

in entities controlled

by non-consolidated subsidiaries (588)(1,475)

Total Tier One Capital 9,618 8,914


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Total Regulatory Capital shareholders’ expectations

30 Jun 00 31 Dec 00

Total Tier One Capital 9,618 8,914

Total Tier Two Capital 6,097 5,802

Tier One and Tier Two Capital 15,715 14,716

Deductions (3,197) (2,278)

Total Regulatory Capital12,518 12,438

Risk Weighted Capital Ratios (%)

Tier one 7.49 6.71

Tier two 4.75 4.37

Less Deductions (2.49)(1.71)

Total 9.75 9.37


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Regulatory capital treatment of investment in life insurance and funds management businesses

  • Net assets deducted from total regulatory capital

  • Excess over net assets deducted from Tier 1 capital

  • Four components of investment:

    • Net assets

    • Value of acquired business-in-force

    • Value of self-generated business-in-force

    • Value of future new business


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New Basel Accord and funds management businesses

  • Comes into effect 2005

  • Operational risk specifically identified

  • Credit risk moved to “realistic” basis

  • Deduction for life insurance and funds management businesses changed (again!)


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Credit Rating Agencies and funds management businesses

  • Desire for AA credit rating

  • Not purely ratios

  • The ability to generate capital


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Capital Generation and funds management businesses


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Capital Adequacy Ratios (%) and funds management businesses(1)

The Market

(1) Source - 2000/01 Half Year Results


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Economic equity and funds management businesses

  • Management assessment of risks

  • Credit risk

  • Market risk

  • Operational risk


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Cost of capital and funds management businesses

  • CAPM used to determine cost of equity

  • Share capital now includes Commonwealth Bank PERLS

  • Subordinated debt not used in cost of capital calculation


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Adding value for shareholders and funds management businesses

Share buy-backs since listing

(1) Buy-back from the Commonwealth Government

(2) Off Market buy-backs

(3) On Market buy-back


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Adding value for shareholders and funds management businesses

CBA Share Price and Buy-Backs

$


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Summary and funds management businesses

  • Shareholders expectations vary according to the taxation treatment of the returns they receive

  • Regulators have a say in the amount of capital required

  • We must not compromise our credit ratings

  • The ability to generate capital is key

  • Active capital management enhances shareholder value


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