Ord Minnett Research Recommendation: Commonwealth Bank of Australia (CBA)
Commonwealth Bank (CBA) announced it has sold its Australian general insurance business, CommInsure General Insurance, to global financial services firm Hollard Group, with completion expected in mid-CY22. CBA will receive upfront consideration of $625m, as well as deferred payments tied to the attainment of business milestones.
The bank has also entered into a 15-year strategic alliance whereby Hollard will distribute home and motor vehicle insurance products to its retail customers in Australia, from which it will earn income.
This sale was well flagged by management and completes the bank’s strategic review of assets within the group.
There is limited disclosure on CBA’s general insurance business. This, along with volatility in earnings (due to claims costs) and uncertainty around undisclosed milestone payments, makes an underlying earnings multiple difficult to assess. The accounts show a general insurance cash net profit of $21m in FY20 and $35m in FY19.
CBA expects to receive a pre-completion dividend, subject to timing of completion and regulatory approvals. The transaction is estimated to result in a post-tax gain on sale of $90m, which includes estimated post-tax separation and transaction costs of $130m.
On completion, the sale is expected to add about $400m in common equity tier-one (CET1) capital, resulting in a pro-forma uplift to CBA’s CET1 ratio of about 9bp. Our current estimates have CBA committing to a $3bn buy-back at its upcoming August result, with a further $6bn in buy-backs to follow in 2H22 and FY23.
CBA is trading on a stretched headline valuation and a large price-to-earnings ratio premium to peers. Nonetheless, we believe it has a group of businesses that are strongly positioned and should drive better earnings growth versus peers over the next three years. We expect the bank to leverage its significant scale and technology advantages, with the added potential for regulatory and compliance costs to drop away. We maintain our Hold recommendation and our $91.00 target price.
Walter Watson
RESEARCH EDITOR
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.