-
?
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Presale Report: CommBank PERLS IX Capital Notes Technical
Tailwinds Support Attractive Pricing Recommendation: Subscribe
Executive Summary Commonwealth Bank of Australia, or
Commonwealth Bank, will raise AUD 750 million — with the ability to
raise more or less — via a Tier 1 hybrid issue, to be listed on the
Australian Securities Exchange, or ASX, called CommBank PERLS IX
Capital Notes (ASX Code: CBAPF). This issue will provide Additional
Tier 1, or AT1, regulatory capital for Commonwealth Bank.
The offer comprises a broker firm offer, eligible securityholder
offer and a priority offer for eligible holders of Colonial Group
Subordinated Notes (ASX Code: CNGHA) to reinvest into CBAPF. There
is no general offer.
CBAPF is a fully paid, non-cumulative, convertible,
transferrable, redeemable, subordinated, perpetual, unsecured note
with a AUD 100 face value and mandatory exchange date of 31 March
2024. Mandatory exchange on that date is subject to exchange
conditions. CBAPF may be exchanged earlier as a result of a trigger
event or Commonwealth Bank exercising an option to call the
security two years early on 31 March 2022. Distributions are
discretionary, non-cumulative and fully franked with a dividend
stopper. Distributions will be paid quarterly in arrears, based on
the 90-day bank bill swap, or BBSW, rate plus a margin in the
indicative range of 3.90% to 4.10% per annum. For example, using
the current 90-day BBSW rate of 1.78%, this equates to a total
estimated gross running yield range of 5.68% to 5.88% per
annum.
Key Takeaways × We recommend investors subscribe to the offer
for CBAPF. We believe the indicative pricing range
of 3.90% to 4.10% is an attractive price for hybrid investors
looking to gain exposure to a Morningstar preferred issuer.
× While the new issue premium of approximately 10 basis points
relative to the major bank Basel III Compliant Additional Tier 1,
or AT1, curve is attractive, the approximate 25 basis point premium
to the average trading margin of the same securities in the past 30
days is compelling.
× The near-term outlook for hybrid pricing should remain
supported by technical factors including diminishing hybrid supply
and a preference for floating rate distributions. We maintain our
preference for moat-rated issuers, such as the major banks.
× It is important to reiterate hybrid securities should not be
viewed as traditional fixed-income products, nor should they be
considered a substitute for low-risk investments such as term
deposits.
Morningstar Research 23 February 2017
John Likos, CFA Senior Credit Analyst, Australia
-
Page 2 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
Recommendation We recommend investors subscribe to the offer for
CBAPF. We assign CBAPF a medium investment risk rating, the same as
other major bank AT1 hybrids in our coverage list. The terms and
conditions, such as non-viability and capital conversion to equity
triggers in this new breed of hybrid securities make them more
equity-like and, consequently, riskier than the "old-style" issues.
Exhibit 1 highlights the rally in major bank hybrid securities
since Commonwealth Bank issued PERLS VIII (ASX Code: CBAPE) in
early 2016. More recently we have witnessed a slow reversal in this
trend, which is not unexpected given the duration of the rally.
Nevertheless, we expect various tailwinds to support hybrids in
2017, including: (i) favourable supply dynamics as several hybrid
issuers opt to redeem without replacement issues; (ii) attractive
yields relative to other securities in the capital structure; and
(iii) floating rate distributions are leveraged to benefit from the
increasing expectation that Australia has hit a bottom in the cash
rate cycle.
Exhibit 1 Trading Margins of Comparable Major Bank Listed Tier 1
Hybrid Securities
Source: Morningstar.
Between a trading margin of 3.90% and 4.10%, CBAPF is being
priced fairly relative to its position in Commonwealth Bank’s
capital structure. A Commonwealth Bank 5-year term deposit, which
has the benefit of a guarantee under the Australian government
financial claims scheme, yields approximately 310 basis points less
than CBAPF. On the other end of the capital structure, Morningstar
forecasts a gross equity dividend yield of about 7.10% on
Commonwealth Bank ordinary shares for fiscal year 2017,
approximately 140 basis points higher than CBAPF's yield to call,
based on the low end of the indicative issue range.
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
Jan-2016 Feb-2016 Apr-2016 Jun-2016 Jul-2016 Sep-2016 Nov-2016
Dec-2016 Feb-2017
ANZPD ANZPE CBAPD CBAPE NABPD WBCPE WBCPF WBCPG
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Page 3 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
Exhibit 2 Commonwealth Bank Capital Structure Relative Yields,
as at 17 February 2017
Source: Morningstar, Commonwealth Bank.
We expect hybrid supply dynamics to provide a strong tailwind to
hybrid prices in 2017. Exhibit 3 is a collection of debt and hybrid
securities that have either not been replaced recently or we do not
expect to be replaced. These include the Woolworths Notes II
(WOWHC) and Origin Energy Subordinated Notes (ORGHA), both of which
were called and not replaced in late 2016. Going forward, we
believe the Tabcorp Subordinated Notes (TAHHC), the Goodman PLUS II
(GMPPA) and the Caltex Subordinated Notes (CTXHA) are more than
likely to be called and not replaced. There is also the possibility
that ANZ Bank opts to refinance their Tier-2 ANZ Subordinated Notes
(ANZHA) in the wholesale market as opposed to the retail market.
Nevertheless, if we exclude ANZHA, the other securities mentioned
make up total potential withdrawn supply of approximately AUD 2.7
billion. If we include ANZHA, this amount blows out to AUD 4.2
billion. Of course, we must keep in mind that we are dealing with
different types of debt and hybrid securities when we compare AT1
hybrids to those issued by corporates so there is a possibility
that this money will not look to move into AT1's. Exhibit 3 Supply
technical to provide hybrid tailwind in 2017 (AUD million)
Source: Morningstar. Red shading denotes securities that have
already been called without a replacement transaction.
2.55%2.90%
3.76%
5.68%
7.10%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
5 Year Term Deposit Senior Unsecured Bond(Jan-22)
Subordinated Bond(Jun-22)
CBAPF (@ 3.90% TM) FYE17 Dividend Yield
0
200
400
600
800
1,000
1,200
1,400
1,600
WOWHC ORGHA TAHHB CTXHA GMPPA ANZHA
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Page 4 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
It is important to reiterate that hybrid securities should not
be viewed as traditional fixed-income products, nor should they be
considered a substitute for low-risk investments such as term
deposits. Therefore, they should offer a yield premium over these
lower-risk products. Hybrid prices can become volatile in times of
distress, similar to shares and unlike traditional senior bonds.
Due to their complex terms and conditions, investors often confuse
key differences between hybrid securities and other investments
from the same issuer. Exhibit 4 outlines some of the key
differences between Commonwealth Bank savings accounts, term
deposits, CBAPF and ordinary shares. Investors should consider
these differences in light of their investment risk and return
profile.
Exhibit 4 Differences Between CBAPF and Other Commonwealth Bank
Investments
Source: Morningstar, Commbank PERLS IX Capital Notes
Prospectus.
In the event of a winding up, CBAPF ranks ahead of ordinary
shares, equally with equal-ranking capital securities such as
CommBank PERLS VI (CBAPC), PERLS VII (CBAPD), PERLS VIII (CBAPE),
behind senior creditors, liabilities preferred by law (such as bank
deposits) and secured debt (covered bonds). Exhibit 5 provides a
summary of Commonwealth Bank's capital structure ranking,
highlighting the relatively low position of CBAPF (PERLS IX) in the
event of a winding up, an event we consider highly unlikely.
Savings Account Term Deposit CBAPF Ordinary SharesGuarantee
under the Australian Government Financial Claims Scheme (1)
Yes Yes No No
Term At call (usually)One month to five years (normally).
Perpetual (Mandatory Exchange Date in seven years) (2)
Perpetual
Distribution Rate Variable (usually) Fixed (usually)
FloatingVariable dividends are payable
Distribution Payment Date Monthly (usually)End of term or per
annum (usually)
Quarterly Semi-annually
Distributions are Discretionary No No Yes Yes
Transferable N/A No (3) Yes, quoted on the ASX (4) Yes, quoted
on the ASX
1. The guarantee is provided for up to A$250,000 deposited per
person with each Australian authorised deposit-taking institution2.
The Mandatory Exchange Date is 31 March 2024 or, if the Mandatory
Exchange Conditions are not satisfied on that date, the first
Distribution Payment Date after that date on which the Mandatory
Exchange Conditions are satisfied3. Can be withdrawn subject to
conditions4. CBA will apply for PERLS IX to be quoted by ASX and
they are expected to trade under code “CBAPF”
-
Page 5 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
Exhibit 5 Ranking of CBAPF in the Event of a Winding Up of
Commonwealth Bank
Due to the uncertainty of the period between transaction
announcement and listing, our preference is for issuers to
compensate investors with a new issue premium. Exhibit 6 plots the
trading margins as at the close of 17 February 2017 of CBAPF's
closest like-for-like major bank issued AT1 securities. These are
all similar to CBAPF being Basel III compliant, however, issuer
risk profiles may vary slightly between the major banks. We have
selected AT1 securities with between four and six-year terms to
call for the purposes of our comparison. Exhibit 6 CBAPF new issue
premium evident when compared to similar AT1 securities
Source: Morningstar. Red scatter plot denotes the lower range of
CBAPF's proposed trading margin.
CBAPF
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
4 4.2 4.4 4.6 4.8 5 5.2 5.4 5.6 5.8 6Years to First Call
-
Page 6 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
CBAPF offers an attractive new issue premium on both the most
recent closing prices of comparable securities and on the average
trading margin of those securities during the last month. Exhibit 7
highlights the sell-off in major bank AT1 securities in the last 30
days. We believe a significant proportion of this is the result of
security repositioning in anticipation of CBAPF. Nevertheless, it
is clear to us that CBAPF provides attractive value when this
"market noise" is considered. Aside from the attractive 10 basis
point premium being offered over the most recent closing prices of
comparable securities, the approximate 25 basis point premium being
offered over the average trading margin of comparable securities in
the most recent 30 days is particularly compelling. Exhibit 7 CBAPF
margin attractive on current and recent pricing (%)
Source: Morningstar.
3.81
3.66
3.76
3.88
4.17
3.30
3.40
3.50
3.60
3.70
3.80
3.90
4.00
4.10
4.20
Close (17-Feb-2017) 30 Days 60 Days 90 Days 180 Days
AT1 Average CBAPF
-
Page 7 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
The Offer The offer comprises: × a broker firm offer; and × a
securityholder offer; and × a priority securityholder offer
The broker firm offer is available to retail investors who are
clients of a syndicate broker. If you are applying under the broker
firm offer, you should contact the syndicate broker, who has
offered you an allocation from their own broker firm allocation,
for information about how and when to lodge your application and
accompanying application monies. The securityholder offer is
available to eligible securityholders. You are an eligible
securityholder if, on 9 February 2017, you: • are a holder of CBA
ordinary shares; or • are a holder of PERLS VI (ASX Code: CBAPC),
PERLS VII (ASX Code; CBAPD) or PERLS XIII (ASX Code: CBAPE); or •
are a holder of Colonial Group Subordinated Notes (ASX Code:
CNGHA), and: • you have a registered address in Australia; or • you
have a registered address outside Australia and you satisfy the
conditions outlined in “restrictions on foreign jurisdictions” on
the inside front cover of the CBAPF Prospectus. CNGHA holders have
to opt in to participate in the priority offer. If they take no
action their securities will be redeemed for cash at face value
plus applicable interest payable on the 31 March 2017, the first
call date. Holders of CNGHA who participate in the securityholder
offer will receive a priority allocation to other securityholders
in relation to reinvesting their CNGHA holdings into PERLS IX.
Additional information relevant to CNGHA holders in relation to an
offer by Commonwealth Bank to redeem their CNGHA notes for AUD 100
per CNGHA note on the basis that those proceeds are to be
automatically reinvested into CBAPF under the CBAPF Prospectus, is
contained in the separate Colonial Group Subordinated Notes
Information Booklet provided to eligible holders with the CBAPF
Prospectus. If you are an institutional investor, you must apply to
participate in the offer by contacting the arrangers prior to the
bookbuild who will provide additional information about how to
apply. Due to the differences between the CNGHA and CBAPF issues,
more information regarding how to apply can be found in Section Six
of the CBAPF Prospectus.
-
Page 8 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
The Key Differences between CNGHA and CBAPF × CNGHA was issued
by Commonwealth Bank subsidiary, Colonial Holding Company Limited,
but is
not explicitly guaranteed by Commonwealth Bank. CBAPF is being
issued by Commonwealth Bank. The risks associated with each
business are different.
× CNGHA is a subordinated debt security maturity date of 31
March 2017, while CBAPF is more equity like being a perpetual
hybrid security. CNGHA will be redeemed on 31 March 2017 as per the
CBA management announcement on 20 February 2017. Risks between
CBAPF and CNGHA are different also due to the difference in the
types of the securities.
× CNGHA has a margin of 3.25% per annum. CBAPF will have a
margin between 3.90% and 4.10%. × CNGHA distributions are not
franked. CBAPF distributions will be franked. × CNGHA has no
capital trigger or non-viability conversion triggers in its terms.
CBAPF has both
which also make it more equity like. Further information on the
key differences between CNGHA and CBAPF can be found in Section 1
of the Colonial Group Subordinated Notes Information Booklet.
Security Risks Capital Trigger Risk CBAPF has a capital trigger
event clause which requires immediate exchange of some, or all,
securities into ordinary shares if Commonwealth Bank's Common
Equity Tier 1 capital ratio equals or falls below 5.125%.
Commonwealth Bank's Common Equity Tier 1 capital ratio, on a Basel
III basis, was 9.90% as at 31 December 2016, representing a healthy
buffer above the 5.125% minimum. If a capital trigger event does
occur, Commonwealth Bank must immediately exchange such number of
CBAPF that is sufficient to return the Common Equity Tier 1 capital
ratio back above 5.125%. Furthermore, if this ratio did fall below
5.125%, CBAPF holders could suffer a capital loss as a result of
the maximum exchange number of shares condition, where holders
potentially receive ordinary shares worth less than the face value
of CBAPF securities. Non-Viability Risk CBAPF also has a
non-viability trigger, which is required by the prudential
regulator, APRA, as part of the Basel III reforms. The
non-viability trigger gives APRA the discretion to require some, or
all, of CBAPF to be exchanged into Commonwealth Bank ordinary
shares, making CBAPF more equity-like than the "old-style" issues
issued under the previous, less-stringent, regulatory framework.
Similar to exchange following a capital trigger event, holders
could potentially receive ordinary shares worth less than face
value. A non-viability trigger event occurs if APRA believes
Commonwealth Bank would become non-viable without an exchange of
some, or all, of CBAPF, or a public-sector injection of capital, or
equivalent, support is necessary because, without it, Commonwealth
Bank would become non-viable. It should be noted that whether a
non-viability trigger event will occur is at the discretion of APRA
and currently there are no precedents for this. APRA may exercise
this discretion should it have a concern regarding Commonwealth
Bank's capital, liquidity or funding levels.
-
Page 9 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
Capital Conservation Buffer Risk Commonwealth Bank, along with
the other Australian major banks, are required to maintain a
capital conservation buffer in the form of Common Equity Tier 1
capital of 2.5% of risk-weighted assets. As a Domestic Systemically
Important Bank, or D-SIB, the capital conservation buffer that
applies to Commonwealth Bank increases by 1.0%, to 3.5% of
risk-weighted assets. On top of the Basel III requirements of
maintaining a minimum Common Equity Tier 1 capital ratio of 4.5%,
the minimum total Common Equity Tier 1 capital requirement is now
at least 8.0% for Australia's four major banks. APRA maintains the
discretion to apply an additional countercyclical buffer up to 2.5%
of Common Equity Tier 1 capital. If Commonwealth Bank's Common
Equity Tier 1 capital ratio falls into the capital conservation
buffer, distributions on CBAPF may not be paid. This is because
Commonwealth Bank will only be able to use a certain percentage of
its earnings to make discretionary payments such as dividends,
hybrid distributions and bonuses. Distributions that are not paid
do not accrue and do not subsequently have to be paid. However, if
this occurs, the dividend stopper will take effect, preventing
Commonwealth Bank from either: (i) declaring a dividend on ordinary
shares; or (ii) returning any capital or undertaking any buybacks
or repurchases in relation to ordinary shares. For this reason we
believe the dividend stopper acts a strong incentive prioritising
hybrid distributions. Commonwealth Bank's Common Equity Tier 1
capital ratio, on a Basel III basis, was 9.9% as at 31 December
2016, representing a healthy buffer above regulatory requirements.
On an internationally comparable basis, the be capital ratio was
very strong at 15.4%. Write-Off Risk If, following a trigger event
(capital trigger or non-viability), conversion has not been
effected within five business days of the conversion date,
investors' rights under the terms of CBAPF will be terminated,
taken to have occurred on the date of the Trigger Event and the
value of the entire investment in CBAPF could lose all its value.
Mandatory Exchange Risk A fall in Commonwealth Bank's share price
to below pre-determined levels relative to the issue date volume
weighted average price, or VWAP, required under the terms of
mandatory exchange, would result in CBAPF not being exchanged on
the mandatory exchange date (31 March 2024) and remaining on issue
until the next distribution payment date when the exchange
conditions are satisfied. Credit/Default Risk This is the risk of
loss arising from Commonwealth Bank defaulting on its payments,
whether in the form of distribution payments or principal
repayment. This is largely offset by Commonwealth Bank's strong
credit profile. Nevertheless, investors should be aware CBAPF is an
unsecured, subordinated investment, so in a wind-up scenario,
investors could potentially lose all of their investment.
-
Page 10 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
Subordination Risk If Commonwealth Bank issues more equal or
higher-ranking securities on the capital structure, CBAPF may
become further subordinated. Market Price Risk The market price of
CBAPF could decrease below face value, depending on various
market-related factors, such as credit spreads, interest rates or
Commonwealth Bank's underlying share price performance. Liquidity
Risk Hybrids are generally less liquid than the shares in the same
company. Low levels of liquidity can make it difficult to buy or
sell a security, raising the risk of buying at an inflated price or
selling at a capital loss. Extension Risk If CBAPF is not called at
the first call date (31 March 2022), it may trade like a perpetual
security. We encourage investors to refer to Section 4 of the
Prospectus for further detail on the risks associated with
investing in CBAPF. Key Dates for the Offer × Securityholder offer
record date: 9 February 2017 × Lodgement of Prospectus with ASIC:
20 February 2017 × Bookbuild: 27 February 2017 × Announcement of
margin: 28 February 2017 × Opening date for the offer and lodgement
of the replacement Prospectus with ASIC: 28 February
2017 × Closing Date for the Offer: 5:00pm (Sydney time), 24
March 2017 × Issue Date: 31 March 2017 × Commencement of deferred
settlement trading: 3 April 2017 × Despatch of holding statements:
4 April 2017 × Commencement of trading on normal settlement basis:
5 April 2017 × Key Dates for Eligible CNGHA Noteholders × Priority
securityholder offer record date: 9 February 2017 × Lodgement of
the CBAPF Prospectus and CNGHA priority securityholder offer
information booklet
with ASIC: 20 February 2017 × Lodgement of the CBAPF replacement
Prospectus and opening date for the priority securityholder
offer: 28 February 2017 × Record date for final distribution on
CNGHA (both participating and not participating in the priority
securityholder offer): 23 March 2017 × Closing date for the
priority securityholder offer 5.00pm (Sydney time): 24 March 2017 ×
Last day of ASX trading for CNGHA: 21 March 2017 × Purchase Date:
31 March 2017
-
Page 11 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
× Issue Date – when CBAPF are issued under the priority
securityholder offer: 31 March 2017 × Payment date for final
distribution on CNGHA: 31 March 2017 × Redemption date for Colonial
Group Subordinated Notes which did not participate in the
priority
securityholder offer: 31 March 2017 Key Dates for CBAPF Capital
Notes × First Distribution Payment Date: 15 June 2017 × First Call
Date: 31 March 2022 × Scheduled Conversion Date: 31 March 2024 Key
Terms × Face value: AUD 100 per security. × Minimum subscription
amount: AUD 5,000 (50 units). Minimum application does not apply
to
Eligible Colonial Group Subordinated Noteholders applying under
the Priority Securityholder Offer. Additional amounts can be bought
in increments of AUD 1,000 (10 units).
× Amount to be raised: Commonwealth Bank plans to raise AUD 750
million via the issue of 7.5 million securities with the ability to
raise more or less.
× Cash distribution rate: (90-day BBSW rate + margin) x (1 −
corporate tax rate). This assumes the CBAPF distribution is fully
franked.
× Margin: The indicative margin range is 3.90% to 4.10% per
annum. × Frequency of distributions: Quarterly on 15 March, 15
June, 15 September, and 15 December. × Franking: Distributions are
fully franked. If a distribution is not franked, the cash
distribution
amount will be increased to compensate for any franking
shortfall. × Distributions: Payment of distributions is
discretionary and subject to payment conditions being
satisfied, the most material being that payment does not cause
Commonwealth Bank to breach its regulatory capital requirements or
become insolvent and APRA not objecting. Distributions are not
cumulative, so unpaid distributions do not accumulate.
× Dividend stopper: If a CBAPF distribution is not paid in full
within five business days of the scheduled payment date,
Commonwealth Bank cannot, without approval of CBAPF holders, pay
dividends on its ordinary shares, undertake a buyback or reduce
capital on any ordinary shares until a distribution is paid in full
on a subsequent distribution payment period.
× Capital conservation buffer: As of 1 January 2016, APRA
required the major banks, as D-SIB's, including Commonwealth Bank,
to increase their Common Equity Tier 1 capital ratio from 7.0% to
8.0%, as part of the D-SIB framework. Restrictions on the
proportion of profits that can be used to pay ordinary share
dividends, Tier 1 capital distributions (including distributions on
CBAPF) and discretionary staff bonuses will apply if Commonwealth
Bank's Common Equity Tier 1 capital ratio falls below 8.0%. APRA
also has the discretion to apply an additional countercyclical
capital buffer to all banks with an indicative range of between 0%
and 2.5% of Common Equity Tier 1 Capital. If applicable, this forms
part of the CCB. APRA has set the countercyclical capital buffer
applicable to Australian exposures at 0%.
× Term: Perpetual, with a mandatory exchange date of 31 March
2024, or any subsequent distribution payment date, subject to
exchange conditions, or if the security is exchanged earlier as a
result of a trigger event or Commonwealth Bank exercising an option
to call the security two years early on 31 March 2022.
-
Page 12 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
× Capital classification: Additional Tier 1 regulatory capital.
× Mandatory exchange date: If CBAPF has not been exchanged or
redeemed earlier, on 31 March
2024, CBAPF will convert into a variable number of Commonwealth
Bank ordinary shares worth approximately AUD 101.01 at a 1%
discount to the 20 business day VWAP of Commonwealth Bank ordinary
shares (subject to exchange conditions). If these conditions are
not satisfied, exchange will be deferred until the next
distribution payment date upon which the conditions are met.
× The mandatory exchange conditions are: × First condition: The
VWAP of Commonwealth Bank ordinary shares on the 25th business
day before (but not including) a potential mandatory exchange
date is greater than 56% of the issue date VWAP of Commonwealth
Bank ordinary shares;
× Second condition: The VWAP of Commonwealth Bank ordinary
shares during the 20 business days before (but not including) a
potential mandatory conversion date is greater than 50.51% of the
issue date VWAP of Commonwealth Bank ordinary shares;
× Third Condition: Commonwealth Bank ordinary shares are listed
and admitted to trade on the Australian Securities Exchange as at
the mandatory exchange date.
× For example, if the issue date VWAP is AUD 83.00, the relevant
VWAP for the first mandatory conversion condition to be satisfied
would need to be greater than AUD 46.48, and for the second
mandatory conversion condition would need to be greater than AUD
41.92.
× Capital trigger event: If Commonwealth Bank determines, or
APRA believes, that Commonwealth Bank's Common Equity Tier 1
capital ratio is equal to or less than 5.125%, Commonwealth Bank
must exchange a sufficient number of CBAPF securities into
Commonwealth Bank ordinary shares to return this ratio above
5.125%. The number of shares on exchange would be based on the VWAP
five business days before the exchange date. However, exchange
following a capital trigger event is not subject to mandatory
exchange conditions being satisfied. This means CBAPF holders could
potentially receive Commonwealth Bank ordinary shares worth less
than face value. This is because the maximum exchange number of
shares would apply based on 20% of the issue date VWAP. For
example, if the issue date VWAP of Commonwealth Bank ordinary
shares was AUD 83.00, the maximum exchange number of shares would
equal 6.0241 Commonwealth Bank ordinary shares for each CBAPF (AUD
100/(AUD 83.00 x 20%)). For example, if the Commonwealth Bank share
price on exchange was AUD 10.00, then CBAPF holders would receive
Commonwealth Bank shares worth approximately AUD 60.20 (6.0241 x
AUD 10.00) for each security.
× A non-viability trigger event occurs if APRA notifies
Commonwealth Bank it believes that exchange of some, or all, CBAPF
(or some action in relation to other Commonwealth Bank capital
instruments) is required, because without it, Commonwealth Bank
would become non-viable; or a public-sector injection of capital is
required because without it, Commonwealth Bank would become
non-viable. Following such an event, Commonwealth Bank must
immediately exchange such number of CBAPF securities specified by
APRA or necessary to satisfy APRA that Commonwealth Bank will no
longer be non-viable. Exchange following this event is not subject
to mandatory exchange conditions being satisfied. The consequence
is similar to exchange following a capital trigger event where
CBAPF holders could potentially receive Commonwealth Bank ordinary
shares worth less than face value.
-
Page 13 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
× Optional exchange: Commonwealth Bank has the option to redeem,
resell or convert some or all CBAPF early on the 31 March 2022
optional exchange date. Commonwealth Bank has the right to redeem
all CBAPF for tax or regulatory reasons at any time. It should be
noted that Exchange and Redemption, as applicable, is subject to
satisfaction of certain conditions and APRA’s prior approval.
× CBAPF holders have no right to request exchange. We have
presented a summary of the key terms. Investors should examine the
CBAPF Prospectus in detail if they intend to invest in CBAPF.
Issuer Details Investment Thesis Commonwealth Bank of Australia is
the largest of Australia's four highly profitable, wide-moat-rated
major banks. It offers a full suite of banking services in
Australia and New Zealand, also operates in certain Pacific and
Asian countries, and sells wealth management, life insurance, and
general insurance in Australia. The financial crisis exposed some
poor commercial lending decisions, but in the long run, the bank
has consistently increased shareholder wealth in favourable
economic times. The loan book's large weighting to home loans and
the high proportion of customer deposits reduce risk. In our
opinion, a wide moat rating is justified. Securitising nonbank
financials and foreign banks previously provided fairly strong
competition for Commonwealth Bank in home and business loans and
business deposits, but the bank's return on equity has not fallen
below the cost of equity for the past 10 years at least. Foreign
banks are a lesser force now, but even in their heyday, they never
mounted a serious assault on the retail franchises, market shares,
or branch networks of the major banks. The sunk costs and
infrastructure were too great to replicate. Local regional banks
follow the majors on pricing and are not currently in a position to
threaten Commonwealth Bank's economic returns. Bouts of apparently
intense price competition between the four major banks have not
threatened superior shareholder returns. Many investors are
concerned about a potential sharp downturn or crash in the
Australian housing market. While Australian housing is expensive
and debt/household income ratios are high, we remain comfortable
for several reasons. Tight underwriting standards, lender's
mortgage insurance, low average loan/valuation ratios, a high
incidence of loan prepayment, full recourse lending, a high
proportion of variable rate home loans, and the scope for
interest-rate cuts by the Reserve Bank of Australia, or RBA,
combine to mitigate potential losses from mortgage lending. We
cannot rule out falling home prices, but investors who readily
compare the Australian residential real estate market to that of
the U.S. and other markets are ignoring fundamental differences.
The modernisation of Commonwealth Bank's core banking systems is
driving real competitive advantage by providing faster and targeted
marketing campaigns, real-time banking, and a smoother, more
efficient customer experience.
-
Page 14 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
The main current influences on earnings growth are modest credit
growth, a product of household risk aversion and deleveraging, and
delays to business plans for capital expenditure. Despite reduced
pressure on funding costs, competition is constraining interest
margins. Bad and doubtful debts expense peaked in first-half fiscal
2009 and continued to decline until the start of fiscal 2016, but
the credit cycle has clearly turned and we expect higher bad debts
going forward. Write-backs of the economic overlay, a general
provision for higher bad debts in case the economy deteriorates
sharply, are on hold despite improving economic conditions.
Wealth-management earnings are trending higher as equity markets
improve. Australia's superannuation system guarantees strong
long-term growth in assets for Australia's wealth-management
industry. In addition, well-managed cost control will underpin
earnings growth, particularly in periods of soft revenue growth.
Commonwealth Bank's wide economic moat will enable it to grow
profitably at the rate of system credit growth despite a range of
headwinds. The four major banks have a powerful grip on lending
markets and are also the first choice of depositors seeking capital
security. Commonwealth Bank has one of the most recognised and
trusted bank brands in Australia, the advertising and marketing
budget, and customer fulfilment capacity (branches, systems,
funding capacity) to capitalise on this brand equity. Commonwealth
Bank has proven it can increase cross-sell ratios, and we expect
further improvements. Excellent cost-efficiency and room for
further incremental improvement facilitate profitable growth even
during periods of pricing pressure. Financial Health On Dec. 31,
2016, Commonwealth Bank had a Basel III Common Equity Tier 1
capital ratio of 9.9% based on the Australian regulator's
interpretation of Basel III rules. Commonwealth Bank is one of the
world's highest credit rated banks and continues to generate
capital organically, given its high return on equity (16.0% in
first-half fiscal 2017), and modest lending growth. We forecast
return on equity to average 16.3% during the next five years.
Recent announcements by global regulators helped clarify future
capital and liquidity requirements for the Australian banking
industry. The Basel III requirements regarding capital are
manageable for Commonwealth Bank. On a globally harmonised basis,
Commonwealth Bank's Common Equity Tier 1 ratio of 15.4% compares
very favourably with global peers. Customer deposits made up 66% of
total funding at December 2016, stable on a year ago. The bank's
superior credit rating and strong reputation in funding markets
enable it to raise the remainder from securitisation, hybrids, and
wholesale funding, of which approximately 35% of was sourced within
Australia. The home loan book is high-quality. On Dec. 31, 2016,
the average loan/valuation ratio for the Australian portfolio was
51%, based on current market values. About 77% of customers were
ahead with their payments by an average of 35 monthly payments
(including offset balances). An allowance for interest rate rises
of 225 basis points is built into serviceability tests.
Mortgagee-in-possession loans were just 0.05% of the portfolio.
-
Page 15 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
In first half fiscal 2017, the loan impairment expense rate was
0.17% of gross loans, stable on first half fiscal 2016 and down
significantly from the previous peak of 0.81% in fiscal 2009, at
the height of the credit crisis. We forecast a rise to a mid-cycle
average of about 24 basis points by fiscal 2021. Economic Moat We
assign a wide moat rating to Commonwealth Bank of Australia, mainly
because of sustainable structural characteristics of the Australian
and New Zealand banking industries, generating high returns on
equity. The other three major banks also have wide moat ratings. In
our opinion, cost advantage is the main source of the wide economic
moats for Australia's four major banks. Intangible assets and
switching costs provide important, but less prominent, moat
sources. The wide moat rating recognises the structural competitive
advantages Australia's four major banks possess. The four major
banks dominate a regulated and rational oligopoly, bestowing
structural advantages that are strong and durable. We believe the
economic moats surrounding the major banks are sufficiently wide to
ensure global sector-leading returns on equity for the foreseeable
future. The four major banks control more than 90% of the business
and consumer lending markets, plus the vast majority of bank
deposits. Pricing is relatively rational. New Zealand is similar.
The concentrated industry benefits from high barriers to entry
across most segments, making it hard for new entrants to gain any
sort of foothold, particularly in retail and business banking.
Foreign banks have not made a serious dent in the domestic majors'
market share, while the smaller regional banks compete on service
and local brand recognition but face higher wholesale funding costs
than the majors and are unable to undercut on price. They tend to
follow the majors in pricing. Well-managed scale drives more scale.
Commonwealth Bank leverages its large branch network to increase
cross-sell, for example, of wealth management and insurance
products. Commonwealth Bank's large scale generates substantial
cost advantages over smaller banks and nonbanks. This enables
Commonwealth Bank to price competitively, but still at levels that
generate current returns on equity. As do the other majors,
Commonwealth Bank has pricing power from brand strength, an
intangible asset. Australians and New Zealanders have a cultural
preference for large financial institutions with heritage brands
because of perceived greater financial security. This preference
exists even when the customer is a borrower. Management &
Stewardship Commonwealth Bank of Australia has a long-term track
record of maximising shareholder value and safeguarding capital. We
therefore allocate an Exemplary stewardship rating to Australia's
largest bank. Since the worst of the global financial crisis, the
bank has steadily increased return on equity, but the AUD 5.1
billion of capital raised in 2015 to satisfy tougher regulatory
requirements resulted in the return on equity declining in fiscal
2016 to 16.5%. Conservative management and a domestically focused
growth strategy are long-term features. Strong risk management is
an overarching feature of the bank's internal processes and
procedures. Commonwealth Bank has committed to maintaining capital
above regulatory minimums, and we expect surplus capital to be
-
Page 16 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
reinvested in the business and/or returned to shareholders via
higher dividends, not wasted on expensive and dilutive acquisitions
or risky expansion plans. In our opinion, CEO Ian Narev is an
impressive executive, appointed in 2011, with a reputation for
understanding the rapidly changing world of banking. He headed
Commonwealth Bank's business and private banking division only from
2009 to 2011 and before that was group head of strategy and led the
acquisition of Bankwest in 2008, as well as the investment in
Aussie Home Loans. Before joining Commonwealth Bank, Narev was a
partner of McKinsey & Company, the global consulting firm, and
prior to that, he was a lawyer specialising in mergers and
acquisitions. Banking is a specialised and risky business. It is
clear that Narev is an excellent and farsighted leader in the
changing world of banking, and he has impressed with his intellect
and grasp of complex issues. The Commonwealth Bank board and
management deserve the Exemplary stewardship rating because of the
conservative, low-risk banking model, especially regarding loan
underwriting standards, provisioning, and capital ratios, while
positioning the bank to benefit from any upturn in key lending and
wealth-management markets. The Core Banking Modernisation project
was an outstanding success, reaching completion on time and within
budget. Further investment in technology will drive meaningful,
visible gains in product cross-sell, customer acquisition,
retention, and revenue growth. Other investments need to support
the key moat features of brand reputation and presence, while any
further expansion in Asia should be modest and based on a long-term
plan to gain valuable experience and contacts in the region. A
small number of bolt-on acquisitions have been carried out in the
past 10 years. The most recent major acquisition was completed in
2008, when Commonwealth Bank purchased Western Australian-based
BankWest from Bank of Scotland for a bargain-basement price in the
depths of the global financial crisis. The acquisition
substantially contributed to Commonwealth Bank's competitive
strengths, increasing distribution capability, scale, and
cost-efficiency. The BankWest brand has been retained and adds to
Commonwealth Bank's stable of valuable brands. It is very unlikely
the competition regulator would allow such a takeover today, but
BankWest was in trouble in 2008, and Commonwealth Bank took full
advantage of its strong balance sheet to complete the acquisition.
K
-
Page 17 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
the relevant Product Disclosure Statement (Australian products) or
Investment Statement (New Zealand products) before making any
decision to invest. Our publications, ratings and products should
be viewed as an additional investment resource, not as your sole
source of information. Past performance does not necessarily
indicate a financial product's future performance. To obtain advice
tailored to your situation, contact a professional financial
adviser. Some material is copyright and published under licence
from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO").
Morningstar Equity Research | 23 February 2017
Research Report Disclosure Document Currency This Research
Report is current as at the date on the report until it is
replaced, updated or withdrawn. Our
financial product research may be withdrawn or changed at any
time as other information becomes available
to us. This report will be updated if events affecting the
report materially change.
Research Criteria For further information as to:
• the scope and expertise of our research, • the process by
which products are selected for coverage, • the filters and
research methodology applied, and • Morningstar’s ratings and
recommendation scales across credit, equity, ETF, fund, and LIC
research,
please refer to the Research Overview documents at
www.global.morningstar.com/au/researchdocuments.
Material Interests and Conflicts of Interest and How We Manage
Them (1) Holding Securities in Product Issuers
No material interests are held by us, our staff, or a related
company in the financial products that are the
subject of the report or the product issuer. Generally, analysts
are not permitted to hold securities in entities
that they rate, subject to specific waivers by the Morningstar
Securities Trading and Disclosure Policy
Committee.
(2) Fees From Publishing This Report
The Morningstar Group and its staff and associates will not
receive any direct benefit from the publication of
this report. Morningstar does not receive commissions for
providing research and does not charge companies
to be rated. Where Morningstar provides research it is
remunerated by subscribers paying a subscription fee.
This fee is variable depending on the client’s specific
requirements.
(3) Who Do We Rate? Morningstar has an associated business,
Ibbotson Associates Australia, which provides investment
management and consulting services. While the two companies have
the same ultimate parent, they have
separate reporting lines, and physical and electronic separation
of employees and resources.
Morningstar avoids any potential conflict of interest by not
undertaking or publishing analyst research on
Ibbotson’s investment products. Morningstar is therefore not
affiliated or related to any financial product
providers rated by us.
(4) Providing Other Services Morningstar may provide a rated
product issuer or its related entities with the following services
or products
for a fee and on an arm’s length basis:
• Software products and licences • Research or consulting
services • Equity, credit and fund data services • Licences to
republish our ratings and research in their promotional material.
(Any licensing
agreement takes place after the ratings and research have been
completed and published to our
clients and the wider marketplace, and the product provider
therefore cannot influence the
outcomes of our assessments. Licensing negotiations are
undertaken by sales employees
segregated from research employees.)
• Event sponsorship • Website advertising
-
Page 18 of 19
© 2017 Morningstar, Inc. All rights reserved. Neither
Morningstar, its affiliates, nor the content providers guarantee
the data or content contained herein to be accurate, complete or
timely nor will they have any liability for its use or
distribution. Any general advice or 'class service' have been
prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544,
AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of
Morningstar, Inc, without reference to your objectives, financial
situation or needs. Refer to our Financial Services Guide (FSG) for
more information at www.morningstar.com.au/s/fsg.pdf. You should
consider the advice in light of these matters and if applicable,
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Morningstar Equity Research | 23 February 2017
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Page 19 of 19
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Morningstar Equity Research | 23 February 2017
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