How a share buy-back will boost your EPS and meet your shareholders

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How a share buy-back will boost your EPS and meet
your shareholders expectations

• John te Wechel
• Head of Group Funding
• Commonwealth Bank of Australia

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Disclaimer

• The material that follows is a presentation of
  general background information about the Banks
  activities current at the date of the
  presentation, 24 July 2001. It is information
  given in summary form and does not purport to be
  complete. It is not intended to be relied upon as
  advice to investors or potential investors and
  does not take into account the investment
  objectives, financial situation or needs of any
  particular investor. These should be considered,
  with or without professional advice when deciding
  if an investment is appropriate.

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Speakers Notes

• Speakers notes for this presentation are
  attached below each slide.
• To access them, you may need to save the slides
  in PowerPoint and view/print in notes view.

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AGENDA

• How much capital?
• Capital Structure
• Cost of capital
• Adding Value for Shareholders

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How much capital?

• Shareholder expectations
• Regulators
• Credit rating agencies
• The market
• Economic Equity

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Shareholder expectations

• CBA share register
• Retail versus institutional investors
• CBA dividend policy

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Beneficial Shareholders by Domicile
of total shares on issue as at May 2001
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Retail versus Institutional investors

• Retail
• Place high value on franking credits
• Prefer a high pay-out ratio
• Personal investors highest tax rate on revenue
  income close to 50
• Change in capital gains tax rates may not yet be
  fully understood

• Wholesale
• More likely to balance value of franking credits
  against other forms of return
• Payout ratio only one amongst many factors
• Super funds pay 15 tax rate
• Overseas investors incur witholding tax on
  unfranked dividends (may prefer capital growth to
  unfranked dividends)

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Regulatory Capital

• Tier 1 capital
• Total regulatory capital
• Capital treatment of investment in life insurance
  and funds management businesses
• New Basle Accord

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Tier 1 Capital

30 Jun 00
31 Dec 00 Tier One Capital Total
Shareholders Equity 18,435 19,461 Eligible
Loan Capital 418 423 Total
Shareholders Equity and Loan Capital 18,853 19,
884 Less Goodwill (5,905) (6,007) Less
Preference shares (86) (39) Less
Intangible component of investment in
non-consolidated subsidiaries (2,656) (3,449
) Less Outside equity interests in entities
controlled by non-consolidated
subsidiaries (588) (1,475) Total Tier One
Capital 9,618 8,914
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Total Regulatory Capital

30 Jun 00
31 Dec 00 Total Tier One Capital 9,618
8,914 Total Tier Two Capital 6,097
5,802 Tier One and Tier Two Capital
15,715 14,716 Deductions (3,197)
(2,278) Total Regulatory Capital
12,518 12,438 Risk Weighted Capital Ratios
() Tier one 7.49 6.71 Tier
two 4.75 4.37 Less Deductions
(2.49) (1.71) Total 9.75 9.37
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Regulatory capital treatment of investment in
life insurance and funds management businesses

• Net assets deducted from total regulatory capital
• Excess over net assets deducted from Tier 1
  capital
• Four components of investment
• Net assets
• Value of acquired business-in-force
• Value of self-generated business-in-force
• Value of future new business

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New Basel Accord

• Comes into effect 2005
• Operational risk specifically identified
• Credit risk moved to realistic basis
• Deduction for life insurance and funds management
  businesses changed (again!)

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Credit Rating Agencies

• Desire for AA credit rating
• Not purely ratios
• The ability to generate capital

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Capital Generation
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The Market

• Capital Adequacy Ratios () (1)

(1) Source - 2000/01 Half Year Results
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Economic equity

• Management assessment of risks
• Credit risk
• Market risk
• Operational risk

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Cost of capital

• CAPM used to determine cost of equity
• Share capital now includes Commonwealth Bank
  PERLS
• Subordinated debt not used in cost of capital
  calculation

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Adding value for shareholders
Share buy-backs since listing
(1) Buy-back from the Commonwealth
Government (2) Off Market buy-backs (3) On Market
buy-back
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Adding value for shareholders
CBA Share Price and Buy-Backs

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Summary

• Shareholders expectations vary according to the
  taxation treatment of the returns they receive
• Regulators have a say in the amount of capital
  required
• We must not compromise our credit ratings
• The ability to generate capital is key
• Active capital management enhances shareholder
  value