Commonwealth Bank faces $2bn in bad debtsFont Size: Decrease Increase Print Page: Print Richard Gluyas | November 14, 2008 Article from: The Australian COMMONWEALTH Bank's bad debt expense could double this year, blowing out from $930 million to well over $2 billion, as the bank absorbs a series of shocks from the collapse of Lehman Brothers, Allco Finance Group and ABC Learning Centres.
Commonwealth Ban chief executive Ralph Norris at its AGM yesterday. Picture: Richard Cisar-Wright Chief executive Ralph Norris delivered the sobering news, along with his assessment that the current environment was the most challenging since the Great Depression, to shareholders at the bank's annual meeting in Melbourne.
He also revealed that CBA had completely written off its entire $440 million unsecured exposure to ABC Learning Centres convertible notes.
In a sometimes tense three-and-a-half hour meeting, shareholders assailed the board over the investment in June last year, eliciting a statement of regret from chairman John Schubert.
"We all learn from every mistake and we need to learn from this," Mr Schubert said.
The chairman was also forced to defend his chief executive against allegations of incompetence, saying he was one of the "outstanding chief executives anywhere in the world".
Mr Norris, for his part, made it clear that CBA was considering all recovery options, including legal action.
The bank, he said, had relied on audited, but inaccurate, information presented to it, and matters had been complicated by the prolonged period the company took to restate its accounts before it went into administration.
The CBA chief said there was no connection between a senior Queensland-based executive, who left the bank to become ABC Learning's financial controller, and the investment in the notes, as that transaction had been undertaken in Sydney.
To a suggestion from shareholder activist Stephen Mayne that 10 CBA staff involved in the ABC Learning deal had been sacked, Mr Norris later said: "It's the first I've heard of it. I'd have to say I'd be surprised."
The CBA meeting set the tone for a dismal day for the nation's major banks.
Westpac slumped $2.13, or 11.2 per cent, to $16.97, while ANZ gave up $1.35, or 8.8 per cent, to $14.05, and National Australia Bank was 53c, or 2.7 per cent, down to $19.40.
CBA shed $2.10 -- almost 6 per cent -- to $33.
While the nation's largest bank said in its first quarter trading update, also released yesterday, that there was no evidence of systemic credit issues, it warned that first-half provisions would be significantly higher. Over the full year, CBA's credit impairment expense was expected to surge from 0.24 per cent of total loans to 0.4-0.5 per cent.
Investment bank UBS said in a note that its forecasts already included 0.36 basis points, or $1.64 billion, of bad and doubtful debts in 2009, up from $930 million.
However, the latest guidance suggested an impairment expense in the range of $1.8-$2.3 billion, and a potential downgrade in earnings of 2-9 per cent.
UBS revised its CBA recommendation from "buy" to "neutral", with a 12-month price target of $35, down precipitously from $43.
In contrast to the sea of red ink with respect to some corporate loans, chief financial officer David Craig -- speaking on a conference call with analysts -- said that the consumer book was still sound, with a slight uptick in home loans that are past 90 days overdue.
Arrears over 90 days in the unsecured portfolio were also stable.
Unlike the CBA annual result, when the bank said it was comfortable with consensus 2009 profit estimates of $4.3-$4.9 billion, Mr Craig said it was not possible to restate the same level of comfort, as forecasts were shifting around in the current, volatile environment.
Mr Norris, similarly, said no decision had been made on dividends when it was suggested that maintaining the annual payment would imply a very high payout ratio of 89 per cent.
"But we're very mindful of the issues surrounding dividends," he said.
With investors now seeking more conservative tier one capital ratios, Mr Norris was also keen to rebut suggestions that the bank's current ratio of 7.5 per cent under APRA guidelines was too skinny.
He said the regulator had made a deduction from CBA's tier one ratio relating to the bank's conservative hedging position, put in place to protect earnings against falling interest rates.
"Our view is we should be rewarded (rather than penalised)," Mr Norris said. Any reversal of the hedge position, he said, would increase the ratio to "well over 8 per cent", and would release a substantial profit as well, which would otherwise emerge over time.
CBA Price at posting:
$33.00 Sentiment: None Disclosure: Not Held
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