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

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. Disclaimer.

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

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  1. 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

  2. Disclaimer The material that follows is a presentation of general background information about the Bank’s 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.

  3. Speaker’s Notes • Speaker’s 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.”

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

  5. How much capital? • Shareholder expectations • Regulators • Credit rating agencies • The market • Economic Equity

  6. Shareholder expectations • CBA share register • Retail versus institutional investors • CBA dividend policy

  7. Beneficial Shareholders by Domicile* * % of total shares on issue as at May 2001

  8. 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) Retail versus Institutional investors

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

  10. 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

  11. 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 Capital12,518 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

  12. 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

  13. 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!)

  14. Credit Rating Agencies • Desire for AA credit rating • Not purely ratios • The ability to generate capital

  15. Capital Generation

  16. Capital Adequacy Ratios (%) (1) The Market (1) Source - 2000/01 Half Year Results

  17. Economic equity • Management assessment of risks • Credit risk • Market risk • Operational risk

  18. 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

  19. 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

  20. Adding value for shareholders CBA Share Price and Buy-Backs $

  21. 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

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