Across client accounts that have selected the ‘Income’ Australian equity option we have taken advantage of the recent sell off to buy Commonwealth Bank of Australia (CBA) before it goes ex-dividend tomorrow, funded by the sale of National Australia Bank (NAB). In our view it makes sense to adopt a proactive approach to enhancing income for clients via high yielding fully franked dividends in an environment where earnings growth is muted, particularly given the major banks are increasingly exposed to broadly the same macro factors as they focus on their domestic operations.

We are positive on the medium-term outlook for Commonwealth Bank for the following reasons:

• It is amongst the best capitalised banks globally with a demonstrated ability to organically build its capital position
• Recent mortgage repricing and improved loan book quality combined with an improving competitive landscape provides a favourable tailwind for a revenue uplift in FY18
• Success in growing its transaction deposits means cheaper, lower risk funding
• The targeted dividend payout means a very attractive fully franked dividend yield
• There is valuation support following the recent derating

We do recognise that regulatory issues arising from the royal commission are likely to continue to weigh on investor sentiment near term. Also, the new bank levy will pressure net interest margins and any deterioration of current benign conditions may lead to increased loan impairments.