CBA launches $5 billion rights issue, backed by record profit

Yesterday, the Commonwealth Bank of Australia, now the country's largest listed company by market cap, surprised no-one in unveiling a record statutory net profit after tax. That net profit and CBA's cash profit were both up five per cent on the previous year, weighing in at around A$9.1 billion, give or take a rounding error. 
 
Return on equity (using the cash basis method) was 18.2 per cent.
 
But the other poorly kept secret was CBA's $5 billion capital rights issue, also officially announced yesterday. So poor was the secrecy that the CBA felt it needed to protect its interests by issuing a denial via the ASX.
 
The offer will be in the format of entitlements to CBA ordinary shares, a pro rata to all eligible shareholders. This option can be exercised to buy one new share for every 23 shares held on the record date for the offer at an offer price of $71.50 per new share.
 
This represents a 10.5 per cent discount to the dividend adjusted closing price on the ASX on 11 August 2015.
 
Eligible retail shareholders who do not exercise, sell or transfer their entitlements will have their entitlements sold on their behalf through a bookbuild process and any sale proceeds will be paid to them.
 
The offer will be fully underwritten to raise approximately $5 billion. Approximately 71 million new fully paid CBA ordinary shares will be issued (approximately 4.3 per cent of shares on issue).
 
All the new shares will rank equally with existing shares in all other respects.
 
Following the capital raising, the Commonwealth Bank Group's pro forma CET1 ratio will be 14.3 per cent on an internationally comparable basis (which assumes full implementation of the Basel III reforms), and 10.4 per cent "on an APRA basis" - up from about 9.1 per cent as at 30 June.
 
That is, the calculation will be made in line with APRA's views - or APRA has come to see the calculations CBA's way. In any case, the group's CFO and treasurer will now have an easier time tapping wholesale markets, should they need to. Ironically, CBA also had a positive year in terms of attracting sticky deposits but will now have an even easier ride.
 
Several reactions to the news from the analysts' briefing are worth noting. One questioned CBA's expectation that it would continue its 75 per cent dividend payout ratio, saying that would become more difficult with around four per cent more shares.
 
Another analyst pointedly asked how profitability could continue at current levels in a subdued business environment, one in which competition ironically is growing and remains intense.
 
With this in mind, CBA pointed out that the main reason for this raising was that the group was around $4 billion short of CET1 capital, based on a mortgage risk weighting of 25 per cent.
 
The raising should leave the group well inside the top end of the CET1 target range of the major banks, and behind only two other global majors, Nordea and UBS.
 
CBA shares will remain in a trading halt pending completion of the equity offer, which is expected to be completed on Monday 17 August, but possibly as early as Friday this week.