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MAKING NEWS

Thu, 18 December 2008
CBA capital raising sideshow
THE Commonwealth Bank's capital raising was a debacle of the bank's own making. But aside from marvelling at the sheer incompetence of it all, the real problem is the dawning reality that Australian bank profits are falling fast. It is galling, to say the least, for CBA to so publicly shoot the messenger in Merrill Lynch, when at issue was the bank's profit and its own obligation to inform the market that bad debt charges were materially higher than previously disclosed. CBA has lagged the market all year on becoming aware that bad debts would rise and that it should lift capital to combat potential losses. All year, and even yesterday, the bank was downplaying the need for it to match other banks' tier-one capital levels. For the record, the bank now has the highest tier-one capital ratio, at 7.5 per cent, just ahead of NAB, which one could take to mean that it, too, realises it has been wrong all year. And what an extraordinarily ham-fisted way to get there. On Tuesday afternoon, when Merrill Lynch rang the market trying to raise $1.7 billion for CBA, it did not pass on word that the bad debt charges had risen. This was not disclosed until the money had been raised. That is a disgrace. ASIC should come down on the banks like a ton of bricks and, arguably, senior executives at the bank should walk or be shown the door. CBA says Merrill was told to tell everyone, but it was the bank's responsibility to do so. The bank now says it will sue Merrill Lynch for failing to fulfil its responsibility, but what does the bank plan to do about its own failures? The latest guidance on bad debts was between 40 and 50 basis points but, not believing the bank, the market consensus was at 53 points and CBA disclosed last night that the real figure was 60 basis points. The new figure, we are told, only came to light late on Tuesday afternoon due to a reassessment of potential personal loans on one line and, on another, the obvious corporate snafus like Centro, Babcock et al. Merrill has lost about $12 million in fees and faces certain legal action from CBA. CBA faces censure and potential penalties from ASIC. ASIC of course should also look at itself, because once again Tuesday's market defied reality, suggesting manipulation. All Tuesday there were rumours of a CBA capital raising, yet miraculously the stock outperformed all the banks, jumping 3.92 per cent to close at $29.15 a share. This made the placement at $27 achievable, but logic would suggest the stock price should have fallen in the face of yet another share issue. Merrill and CBA had been in contact daily for the past two weeks because the broker was selling shares to manage the $750 million hybrid repurchase. This was all in the market and still CBA wasn't alert to its continuous disclosure obligations, while its share price was seemingly being manipulated to manage the price. UBS is the only player to have emerged with distinction. It moved in quickly yesterday morning, picking up about $26 million and Ralph Norris's enduring thanks. Norris was telling anyone who would listen yesterday that UBS boss Matthew Grounds and his comrades walk on water. When the investor base revolted over CBA's lack of disclosure, Grounds was on the phone to Norris and his hapless CFO David Craig at 7.30am yesterday offering to help (for a fee), and the due diligence team walked through CBA's doors at 8am. By 9.15am the papers were signed and Norris had an underwritten deal to raise $1.7 billion. To sell CBA yesterday, even at a lower price of $26 a share, was a commendable performance. This was a debacle but at the end of the day, while CBA stuffed up badly, it at least belatedly realised it needed to raise more capital and has done so. Investors can now look forward to a steady stream of bank profit downgrades, as impairment charges take centre stage for the sector. Corporate collapses have been around for a year or more, but personal debt starts to look shaky when unemployment rises, and that is next year's reality. Source: The Australian

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