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There's more than meet the eye in profit numbers.
Comm Bank Set to Take Big Hit on Klarna

By Glenn Dyer |
The Commonwealth Bank (CBA) is facing the prospect of a billion dollar plus impairment of the book value of its 5.5% stake in the Buy Now Pay Later (BNPL) giant Klarna following news the Swedish-based group is finding it harder to raise new capital at prices sharply lower than a year ago.

The CBA will have to reveal a new valuation for its stake either in its August full year results or in an update before reporting.
Media and analyst reports from Europe at the weekend said Klarna is looking for new money that implies a value of $US15 to $US20 billion compared to the peak value of $US46 billion a year ago.

The Wall Street Journal reported that Klarna was now looking for new capital at a price that would value it at around $US15 billion.

The Financial Times reported that Klarna had failed to raise money at a $US20 billion value, meaning the CBA did not inject new money into the BNPL giant and raising questions about its balance sheet valuation for the 5.5% stake.

The FT also reported fund raising attempts earlier this year st higher prices had also failed.

Klarna’s struggles to raise new money highlights the growing crisis of the “buy now, pay later” business model that has already sent shares in listed operators sharply lower in the US and Australia.

The ending of pandemic lockdowns has seen consumers move back to in store buying and more use of debit cards, according Reserve Bank data.

Bad debts have also risen for BNPL companies as they have been forced to recognise them.

Shares in Afterpay’s US owner Block are down 63% year to date while shares in Affirm (Walmart and Amazon are its biggest clients) are down 80% or more, as are local operators here such as Zip and Sezzle.

The CBA had valued its Klarna stake at $2.7 billion in its annual accounts, up from just over $500 million a year earlier.

The CBA moved to a stake around 5.5% in January 2021 when it paid $200 million to lift its 1.7% stake by around 3.7% stake.
That saw the Bank boost the book value to $2.7 billion in the annual accounts released in August, 2021.

A year later and Klarna’s value has fallen sharply, as evidenced by the struggle it is having to get new money at lower price levels that look like being 50% to 70% lower than the 2021 valuation.

That should coerce the CBA into updating the ASX as to what its new book value is. Any impairment will be a non-cash write down.

The CBA, like all other financials, is facing rising pressures of its own from higher interest rates and inflation, a possibly slowing economy and potentially more bad debts.

Pumping more money into Klarna when the CBA will need as much capital as can hold onto, should rule out any generosity in any new raising.

In May, the Stockholm-based company cut 10 per cent of its workforce of more than 7,000 people, blaming the Russian invasion as well as rising inflation, market volatility and a shift in consumer behaviour.

Klarna is owned by a large group of investors including SoftBank, Sequoia Capital, Silver Lake, Bestseller Group, Dragoneer, Permira, Visa, Commonwealth Bank, Ant Group and Atomico.

Apple’s decision to enter the buy now, pay later sector earlier this month, has added further pressure on Klarna and its rivals.
The threat of new regulation in Europe, the UK, the US and Australia is an added worry and potentially, means higher costs.

CBA’s Klarna bet slumps 67pc in 12 months

Commonwealth Bank is still sitting on a pretty profit from its investment in BNPL group Klarna, but it ain’t what it used to be.
Jun 20, 2022 – 5.00am


It’s rare that doubling your dough could feel a little disappointing. But while Commonwealth Bank is still well ahead on its 5 per cent stake in Swedish buy now, pay later group Klarna, the staggering drop in the fintech’s valuation has given Australia’s biggest bank a taste of the carnage sweeping through the global venture capital sector.

A report in the Wall Street Journal on Friday night suggested Klarna had downsized its latest capital raising from $US1 billion ($1.44 billion) to $500 million, as funding for tech companies dries up. Even more startling was the valuation Klarna is apparently seeking to raise on: $US15 billion.

Commonwealth Bank CEO Matt Comyn hasn’t lost faith in Klarna.  David Rowe
This is some comedown. In June 2021, Klarna raised money from Japanese venture capital fund SoftBank at a valuation of $US46 billion.

In May, when the WSJ first reported Klarna was considering a capital raising, a valuation of around $US30 billion was mentioned in dispatches. In just a month, Klarna’s valuation appears to have halved.

CBA acquired its 5 per cent stake for $US300 million across tranches of $US100 million and $US200 million in August 2019 and January 2020 respectively. So if Klarna is now worth $US15 billion as suggested, CBA’s stake is still worth $US750 million.


That’s nothing to sneeze at, of course, but it’s not the $US2.3 billion it was worth 12 months ago.

Still, Klarna would be doing well if it can raise money at a valuation 67 per cent below last year. Shares in US BNPL group Affirm are down 73 per cent in the last year, while ASX-listed group Zip is down 93 per cent.

Klarna’s tumble is yet more evidence of the reckoning hitting the global venture capital sector as interest rates rise and investors run away from risk.

Stories of job cuts abound – tech publication Crunchbase has a running tally that sits around 21,000 and Klarna itself has cut 10 per cent of its staff – but new investors are also demanding harsh conditions of tech companies.

Reports suggest investors are demanding what are called enhanced liquidation preferences, whereby they are guaranteed to get a profit before old investors (or employees holding stock options) get paid.

These liquidity preferences aren’t new, but apparently some investors are demanding deals where they get three times their outlay back before anyone else.

Apparently all this frugality isn’t going down so well with tech workers in Silicon Valley, with venture capitalist Bill Gurley last week noting the end of “Disney-esque set of experiences/expectations in high-tech companies… For employees that have only known this world, the idea of layoffs or cost reduction (or being asked to come into the office) is straight up heresy…

Unfortunately, you can’t’ ‘wish away’ the fact that if your company isn’t cash flow positive and capital is now expensive, you are living on borrowed time. ‘Culture’ won’t matter if your company isn’t around”.

Klarna is arguably better positioned to survive this period than some of its rivals; it has a 17-year history and its deposit-taking operations in Northern Europe should give it greater resilience.

It’s also worth noting that in addition to a stake in the main business, CBA’s Klarna deal also makes it a joint venture partner in the Swedish group’s Australian operations.

CBA chief Matt Comyn was clear at The Australian Financial Review Banking Summit last month that he still believes in Klarna, arguing that while BNPL has been commoditised, Klarna’s ability to deliver leads to merchants remained a key differentiator.
Given how keen CBA is to find ways for its consumer and business customers to benefit from each other, that alone could ultimately make the experiment worthwhile.

Comyn will also be watching the slide in the bitcoin price with interest; it plunged below $US20,000 on the weekend and is now down 60 per cent since the start of the year.

CBA is quietly pushing ahead with its plan to restart the small cryptocurrency trading pilot it launched last year; Comyn said last month the air has clearly come out of the sector, but interest from customers – mainly younger male ones – remained strong and the opportunity is still there to provide them with a safe place to trade.


The temptation here is to accuse CBA of getting carried away with fads – BNPL and crypto – that have turned out to be built on cheap money and hot air.

But the alternate view is that the bank made modest investments in areas that have allowed it to better understand changing customer preferences.

A willingness to experiment inside cautious guard rails is not something to discourage in large companies where change often comes too slowly. Experiments always bring lessons, sometimes bring failures and occasionally bring profits.
That’s still the case with Klarna – at least for now.