CBA (ASX:CBA) doubles down on 'core business' with $1.8 billion sale

$1.8 billion going straight into the piggy bank…

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Key points
  • The Commonwealth Bank of Australia share price is on the rise today, up 1.74% to $95.09
  • Around $1.8 billion in gross proceeds are expected from selling a portion of its shareholding in the Bank of Hangzhou
  • The sale is aligned with CBA's strategy to focus on its core business in Australia and New Zealand

The Commonwealth Bank of Australia (ASX: CBA) share price is pushing higher today.

This follows the Aussie bank announcing it has entered into a binding sale agreement involving its share in the Chinese commercial bank Bank of Hangzhou Co Ltd.

In early morning trade, shares in CBA are swapping hands at $95.09, up 1.74%.

A man wearing glasses sits back in his desk chair with his hands behind his head staring smiling at his computer screens as the ASX share prices keep rising

Image source: Getty Images

What are the details of the deal?

Commonwealth Bank shareholders might be eagerly rubbing their hands together this morning following the bank's latest announcement.

According to its release, CBA has decided to sell a chunk of its 10% shareholding in the Bank of Hangzhou. The bank was founded in 1996 and predominantly serves small and medium enterprises, as well as urban and rural residents, in China.

Moreover, the sale is being made to Hangzhou Urban Construction and Investment Group and Hangzhou Communications Investment Group. Both of these entities are majority-owned by the Hangzhou Municipal Government.

The deal is estimated to be worth $1.8 billion before costs. While ASX-listed CBA will retain a shareholding of roughly 5.57% in the Bank of Hangzhou, this remaining stake will be held until at least 28 February 2025, subject to exceptions.

CBA CEO Matt Comyn explained what the transaction means for the bank going forward:

CBA is pleased to have played a meaningful role in HZB's development since our original investment in 2005. Our collaboration has seen HZB become a significant player in retail, wealth management and commercial banking across the Yangtze Delta region. The reallocation of part of our shareholding to local partners will support the further expansion of HZB.

At the same time, the partial sale of our shareholding is consistent with our strategy to focus on our core banking business in Australia and New Zealand. Our ongoing shareholding in HZB following completion of the Transaction will enable us to continue to support its development as one of China's leading city commercial banks, and complement our relationships in the region.

How else does the deal impact ASX-listed CBA?

Following completion of the transaction, CBA expects an improvement in its CET1 ratio, which acts as the bank's capital buffer. Based on the company's risk-weighted assets as at 31 December 2021, a 35 basis point improvement is anticipated.

Additionally, the sale will result in a post-tax gain of $340 million. The remaining stake will be treated as a strategic equity investment. Essentially, this means the bank will no longer recognise its share of Bank of Hangzhou's profits under 'other banking income' in future financial statements.

Finally, the transaction is slated to be completed sometime around the middle of this year.

The CBA share price is up 12% over the last 12 months.

Motley Fool contributor Mitchell Lawler owns Commonwealth Bank of Australia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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