The Commonwealth Bank of Australia (ASX: CBA) share price is in focus after the major bank announced its FY21 result with a big share buyback and dividend.
CBA is the biggest bank in Australia, ahead of the other big four banks of National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).
CBA FY21 result
Commonwealth Bank reported that it generated $8.65 billion of cash net profit after tax, up 19.8% on FY20. Statutory net profit jumped 19.7% to $8.84 billion.
Operating income rose 1.7% to $24.16 billion, whilst operating expenses increased 3.3% to $11.36 billion. Excluding remediation costs, operating expenses rose 2%. CBA pointed out that staff expenses rose 4% and ‘occupancy and equipment’ expenses rose 6% due to rent expenses from vacating commercial office space and consolidation of its property footprint.
Loan impairments
An important part of the profit improvement was a reduction of the loan impairment expense – down 78% to $554 million. CBA explained that this decrease reflected an improvement in economic conditions and outlook. But it has still maintained a strong provision coverage ratio of 1.63%, reflecting the economic uncertainty from the continuing impacts of COVID-19.
The expectation of some loans going bad saw the CBA share price get crunched in FY20.
NIM
However, whilst the economic picture is improving, CBA’s net interest margin (NIM) continues to edge lower. CBA’s overall NIM declined 4 basis points (0.04%) to 2.03%. The bank said that the NIM declined because of higher liquid assets (eg deposits in savings accounts) and the ongoing impact of a low interest rate environment.
The NIM is important because it shows the difference between the cost of CBA’s funding (like deposits) against the money it makes from the loans it lends out (such as mortgages).
A falling NIM means the bank is less profitable on the loans and funding it has.
The bank is expecting further pressure on the NIM due to a number of headwinds, such as price competition, a high level of customers switching to fixed rate loans and higher rates of deposits.
Balance sheet strength (CET1 ratio)
CBA reported that its common equity tier 1 (CET1) ratio increased by 150 basis points (1.50%) to 13.1% over the year.
This allowed the business to announce some enormous shareholder returns.
CBA FY21 dividend and share buyback
CBA’s board has decided to pay a final FY21 dividend of $2 per share. That brings the total FY21 dividend per share to $3.50, an increase of 17% on FY20.
The bank announced a $6 billion off-market share buy-back. CBA said that its strong capital position and progress on its strategy means it’s well placed to support customers and manage ongoing uncertainties, while also returning a portion of excess capital.
CBA pointed out that a buyback is effective because shareholders will benefit from a lower share count, which supports return on equity, earnings per share (EPS) and dividend per share.
In regards to the size of the buyback, CBA pointed out that it has generated $6.2 billion of excess capital from divestments since the start of FY19.
Summary thoughts on CBA and the share price
A $6 billion buyback is huge. Add that to the dividend, and shareholders are being showered with cash. But with a pre-open CBA share price above $106, it’s priced very highly – according to CommSec (with external data) it’s valued at 20 times the estimated earnings for the 2022 financial year.
That’s expensive for a bank, though CBA is seemingly higher quality than all other domestic ASX banks. There are other ASX dividend shares I would rather look at for income.
