CBA Takes A Beating

Post by Sharat on November 14, 2008 · Under Company News, Equities, banking, investments, news · Comment

It has been a terrible couple of weeks for CBA; two major brokers downgraded Commonwealth Bank of Australia since the beginning of last week. Investors were spooked over the bank’s exposure to Allco Finance and ABC Learning. The capital raising by rival NAB at the start of this week which had the effect of improving its tier one capital ratio, all but guaranteed that investors would lay siege to CBA’s stock price over the last two days, as investors demand that the bank observe the more conservative benchmarks in capital adequacy that its peers are observing.

The bad news started last week with Deutsche Bank downgrading CBA from hold to sell, and then spilled over into this week after Citi followed suit with its own downgrade. Morgan Stanley reaffirmed its sell recommendation all but confirming a rout was in the air. Deutsche and Morgan Stanley slashed both their EPS, and 12 month price targets for the bank.

CBA stock took a battering on Wednesday, falling below broker price targets and the beating continued on Thursday with the stock closing at A$ 33, falling from a high of over A$ 44 at the beginning of last week.

Investor concern largely lies with the bank’s exposure to bankrupt entities Allco Finance and ABC Learning Centres. NAB raised the bar at the start of the week when it raised A$ 3 billion and improved its tier one capital ratio to 8.1 percent. CBA’s tier one capital ratio currently stands at 7.6 percent, short of what investors now expect to be the minimum after NAB’s highly successful capital raising.

CBA intends to do some additional fundraising to remedy this, it has a Dividend Reinvestment Program Scheduled for next week, though that is also going to be a drag on the stock as there will be a constant seller in size on the market until the DRP reaches conclusion.

The perception prior to the high profile insolvencies was that CBA was a lender that had managed to somehow avoid the worst of the credit crisis. Whilst its rivals had to refinance portions of their balance sheets that were being used to hold dodgy loans, either through stock market offerings or hedging agreements, as both ANZ and NAB had to do respectively, CBA seemed remarkable pristine.

The Aussie banking major raised A$ 2 billion mid October to fund its acquisition of BankWest, and in retrospect, that seems like a missed opportunity to strengthen their balance sheet (they could have raised more, but market conditions back then were not particularly great).

If CBA had not acquired BankWest and St. Andrews from HBOS at what was a very reasonable if not distressed valuation, and bought the greater market share in faster growing Western Australia, then investors would have been questioning that decision as well and no doubt some kind of penalty would have been imposed on its stock price at a later date. So it was caught between the proverbial rock and the hard place.

Citi analyst Craig Williams in his briefing said that the structured credit exposures reported by ANZ and NAB earlier this year had led some investors to believe that CBA would outperform its peers on credit quality. This is no longer likely in the aftermath of Allco Finance and ABC Learning Centres becoming insolvent. Mr Williams went even further and said CBA’s provisioning coverage was “lacking” compared to its peers. Mr. Williams said that the bar had been lifted in terms of capital adequacy and CBA was in danger of “not measuring up”

The other challenge that CBA faces is that it must refinance billions of dollars of BankWest term funding that it received on the wholesale money markets. The bank tried to alleviate some of those concerns at its Annual General Meeting on Thursday. Chief Executive Ralph Norris addressed those issues directly in his presentation to CBA’s annual meeting and in its September quarter update.

The bank has raised $11 billion of the $28 billion needed for next year already and has attracted a disproportionate share of the retail deposits that have flown to the safe haven of the banks. It now accounts for about 30 per cent of the system’s deposits and holds $66 billion in liquid assets.
CBA tried to soothe the market by arguing at its AGM that if the UK’s FSA method of calculation were used rather than APRA’s it would be well above both its peers and the average for European banks.

The market had none of that unfortunately and the stock continued to sell off for the rest of the day closing at $33.00 on Thursday.

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