Why has the CBA share price jumped today?

Posted: 4 October 2021 1:33 pm
News
CBA-shares-04Oct_1800x1000_Finder

Shares in the top lender have surged nearly 60% in the past 12 months.

Shares in Commonwealth Bank (ASX: CBA) are a market favourite, and this is reflected in the stock having the highest weightage on the benchmark ASX 200 index. On Monday, the stock had zoomed again, up 4.6% to $104.72 at the time of writing and topping the list of most-traded stocks.

Why is the CBA stock price gaining?

The immediate trigger for the gains in the CBA stock has been its announcement of the completion of its share buyback. In August, Australia’s biggest lender unveiled its biggest off-market share buyback worth $6 billion.

On Monday, CBA said it had actually received applications worth a massive $24 billion, forcing it to scale back allocations by 79.4%. The bank will buy back and cancel 67.7 million shares, representing 3.82% of its shares on issue.

CBA announced a final buyback discount of 14% on shares with a face value of $103.05 each, and the bank said it was structured to minimise disadvantage to shareholders with a small holding.

Share buybacks typically result in an increase in the stock price because they increase the share of the company profit attributable to each remaining share. In CBA’s case, earnings per share will increase for the remaining 96.18% of the shares, leading to an increase in their market value.

CBA’s last major buyback, in 2006, amounted to about $500 million. Even before today’s gains, CBA shares had already surged nearly 60% over the last 12 months.

Strong position

In addition, CBA says the buyback will reduce its Common Equity Tier 1 capital ratio by about 133 basis points.

The lender already had a CET 1 ratio of 13.1% at June-end, far in excess of the unquestionably strong 10.5% benchmark mandated by the prudential regulator APRA. That will improve even further now giving the bank a further buffer.

Meanwhile, investors are also betting on an improvement in economic conditions in Australia as the country’s two biggest states – New South Wales and Victoria – are poised to lift their COVID-19 lockdowns this month.

A likely spurt in economic activity would help boost performance in CBA’s core retail, business and institutional banking businesses. In August, the bank reported better than expected full-year results with cash profit for the 12 months to June 30 rebounding nearly 20% to $8.65 billion.

CEO Matt Comyn has said the bank’s continued balance sheet strength and very strong capital position has allowed CBA to support customers while delivering strong and sustainable returns to shareholders.

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