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

shareholders’ expectationsshareholders’ expectations

John te WechelJohn te WechelHead of Group FundingHead of Group Funding

Commonwealth Bank of AustraliaCommonwealth Bank of Australia

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

DisclaimerDisclaimer

Speaker’s NotesSpeaker’s Notes

• Speaker’s notes for this presentation Speaker’s notes for this presentation are attached below each slide.are attached below each slide.

• To access them, you may need to To access them, you may need to save the slides in PowerPoint and save the slides in PowerPoint and view/print in “notes view.”view/print in “notes view.”

AGENDAAGENDA

• How much capital?How much capital?

• Capital StructureCapital Structure

• Cost of capitalCost of capital

• Adding Value for ShareholdersAdding Value for Shareholders

How much capital?How much capital?

• Shareholder expectationsShareholder expectations

• RegulatorsRegulators

• Credit rating agenciesCredit rating agencies

• The marketThe market

• Economic EquityEconomic Equity

Shareholder expectationsShareholder expectations

• CBA share registerCBA share register

• Retail versus institutional investorsRetail versus institutional investors

• CBA dividend policyCBA dividend policy

2%

53%28%

17%

Australian Retail Investors Foreign Retail Investors

Australian Institutional Investors Foreign Institutional Investors

Beneficial Shareholders by Domicile*Beneficial Shareholders by Domicile*

* % of total shares on issue as at May 2001

Retail versus Institutional investorsRetail versus Institutional investors

RetailRetail• Place high value on franking Place high value on franking

creditscredits

• Prefer a high pay-out ratioPrefer a high pay-out ratio

• Personal investors highest Personal investors highest tax rate on revenue income tax rate on revenue income close to 50%close to 50%

• Change in capital gains tax Change in capital gains tax rates may not yet be fully rates may not yet be fully understoodunderstood

WholesaleWholesale• More likely to balance value More likely to balance value

of franking credits against of franking credits against other forms of returnother forms of return

• Payout ratio only one Payout ratio only one amongst many factorsamongst many factors

• Super funds pay 15% tax rateSuper funds pay 15% tax rate• Overseas investors incur Overseas investors incur

witholding tax on unfranked witholding tax on unfranked dividends (dividends (may prefer capital may prefer capital growth to unfranked growth to unfranked dividendsdividends))

Regulatory CapitalRegulatory Capital

• Tier 1 capitalTier 1 capital

• Total regulatory capitalTotal regulatory capital

• Capital treatment of investment in life insurance and Capital treatment of investment in life insurance and funds management businessesfunds management businesses

• New Basle AccordNew Basle Accord

30 Jun 00 31 Dec 00 30 Jun 00 31 Dec 00

Tier One CapitalTier One CapitalTotal Shareholders’ EquityTotal Shareholders’ Equity 18,43518,435 19,46119,461Eligible Loan CapitalEligible Loan Capital 418 418 423 423Total Shareholders’ Equity and Loan CapitalTotal Shareholders’ Equity and Loan Capital 18,85318,853 19,88419,884Less GoodwillLess Goodwill (5,905) (5,905) (6,007)(6,007)Less Preference sharesLess Preference shares (86) (86) (39) (39)Less Intangible componentLess Intangible component of investment inof investment in

non-consolidated subsidiariesnon-consolidated subsidiaries (2,656)(2,656) (3,449)(3,449)Less Outside equity interestsLess Outside equity interests

in entities controlledin entities controlled by non-consolidated subsidiariesby non-consolidated subsidiaries (588) (588) (1,475)(1,475)

Total Tier One CapitalTotal Tier One Capital 9,6189,618 8,914 8,914

Tier 1 CapitalTier 1 Capital

Total Regulatory CapitalTotal Regulatory Capital 30 Jun 00 31 Dec 30 Jun 00 31 Dec

0000

Total Tier One CapitalTotal Tier One Capital 9,618 9,618 8,914 8,914Total Tier Two CapitalTotal Tier Two Capital 6,097 6,097 5,802 5,802Tier One and Tier Two CapitalTier One and Tier Two Capital 15,715 15,715 14,71614,716DeductionsDeductions (3,197 (3,197)) (2,278 (2,278))Total Regulatory CapitalTotal Regulatory Capital 12,51812,518 12,43812,438

Risk Weighted Capital Ratios (%)Risk Weighted Capital Ratios (%) Tier oneTier one 7.49 7.49 6.71 6.71Tier twoTier two 4.75 4.75 4.37 4.37Less DeductionsLess Deductions (2.49)(2.49) (1.71)(1.71)TotalTotal 9.75 9.75 9.37 9.37

Regulatory capital treatment of investment in life Regulatory capital treatment of investment in life insurance and funds management businessesinsurance and funds management businesses

• Net assets deducted from total regulatory capitalNet assets deducted from total regulatory capital

• Excess over net assets deducted from Tier 1 capitalExcess over net assets deducted from Tier 1 capital

• Four components of investment:Four components of investment:

– Net assetsNet assets– Value of acquired business-in-forceValue of acquired business-in-force– Value of self-generated business-in-forceValue of self-generated business-in-force– Value of future new businessValue of future new business

New Basel AccordNew Basel Accord

• Comes into effect 2005Comes into effect 2005

• Operational risk specifically identifiedOperational risk specifically identified

• Credit risk moved to “realistic” basisCredit risk moved to “realistic” basis

• Deduction for life insurance and funds management Deduction for life insurance and funds management businesses changed (again!)businesses changed (again!)

Credit Rating AgenciesCredit Rating Agencies

• Desire for AA credit ratingDesire for AA credit rating

• Not purely ratiosNot purely ratios

• The ability to generate capitalThe ability to generate capital

Capital Generation Capital Generation

Sources and Uses of Capital30 Jun 2000 30 Jun 1999 30 Jun 1998

Sources of CapitalCapital generated by the business 779 321 373Issues of Shares (including DRP) 9,615 308 429Reduction in Tier 1 ratio 0 1,009 539Total 10,394 1,638 1,341

Uses of CapitalShare buy-backs 553 650 653Decrease in eligible loan capital 286 575 0Acquisition of Colonial 8,123 0 0Growth in RWA 875 413 688Increase in Tier 1 capital 557 0 0Total 10,394 1,638 1,341

The MarketThe Market

• Capital Adequacy Ratios (%) Capital Adequacy Ratios (%) (1)(1)

(1) Source - 2000/01 Half Year Results

ANZ CBA NAB WBC

Tier 1 7.33 6.71 6.57 6.11

Total Capital 10.49 9.37 9.20 9.34

Economic equityEconomic equity

• Management assessment of risksManagement assessment of risks

• Credit riskCredit risk

• Market riskMarket risk

• Operational riskOperational risk

Cost of capitalCost of capital

• CAPM used to determine cost of equityCAPM used to determine cost of equity• Share capital now includes Commonwealth Bank Share capital now includes Commonwealth Bank

PERLSPERLS• Subordinated debt not used in cost of capital Subordinated debt not used in cost of capital

calculationcalculation

Adding value for shareholdersAdding value for shareholders

(1) Buy-back from the Commonwealth Government

(2) Off Market buy-backs

(3) On Market buy-back

Date Value($m)

Buy-backPrice

($)

CapitalPortion

($)

DividendPortion

($)July 1996 (1) 1000 10.008 2.00 N/A

December 1997 (2) 650 17.08 7.00 10.08

March 1999 (2) 650 23.78 9.00 14.78December 1999 (2) 553 27.00 27.00 N/A

November 2000 (3) 200 29.86 29.86 N/A

April 2001 (2) 700 27.84 10.00 17.84

Share buy-backs since listing

Adding value for shareholdersAdding value for shareholders

0

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15

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25

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40

Jul-96Sep-96Nov-96Jan-97M

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ay-97Jul-97Sep-97Nov-97Jan-98M

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ay-98Jul-98Sep-98Nov-98Jan-99M

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ay-99Jul-99Sep-99Nov-99Jan-00M

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ay-00Jul-00Sep-00Nov-00Jan-01M

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CBA Share Price ($)

$ CBA Share Price and Buy-Backs

SummarySummary

• Shareholders expectations vary according to the Shareholders expectations vary according to the taxation treatment of the returns they receivetaxation treatment of the returns they receive

• Regulators have a say in the amount of capital requiredRegulators have a say in the amount of capital required

• We must not compromise our credit ratingsWe must not compromise our credit ratings

• The ability to generate capital is keyThe ability to generate capital is key

• Active capital management enhances shareholder valueActive capital management enhances shareholder value