Is Australia’s leading bank poised to reduce its outstanding share capital?
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The Commonwealth Bank of Australia (ASX: CBA) share price has started the week off in positive territory on Monday morning. This follows a media report that Australia’s largest bank may tap into its war chest to launch a buyback program.
At the time of writing, CBA shares are swapping hands for $105.58, up 1.52%. In comparison, the S&P/ASX 200 Index (ASX: XJO) is sitting at 7,563 points, up 0.34%.
What buyback plan?
According to the Australian Financial Review, CBA may unlock $5.5 billion to buy back its shares through a series of off-market trades. This is a massive turnaround from when the bank approved loan repayments to be deferred during COVID-19 last year.
In a broker note released on 3 August, Goldman Sachs forecast that CBA would report cash earnings of $8.34 billion in its full-year results on Wednesday. This represents a 15.5% increase when compared to the prior corresponding period. The robust performance is likely to be attributed to the company’s improved retail banking division and business banking branch.
In addition, CET1 capital ratio is forecasted to come in at 12.9%, an increase of 134 basis points against FY20.
However, due to the evolving COVID-19 situation, there may be some risk to the timing and magnitude of capital management.
The buyback could be set at the maximum discount allowed by the Australian Taxation Office – at 14%. Effectively, this would place CBA shares at a buyback price of around $90 per share.
Goldman Sachs rated CBA shares as a sell, with a 12-month price target of $81.87. Based on the current share price, this implies a downside of roughly 21.8%.
CBA share price snapshot
Over the last 12 months, CBA shares have gained 45% for shareholders, with year-to-date above 25%. It’s worth noting that the company’s share price is nearing its all-time high of $106.57 reached in mid-June.
CBA commands a market capitalisation of approximately $184 billion, making it the biggest company on the ASX.
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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.