Shares in Commonwealth Bank dropped sharply yesterday after resuming trading in the wake of the $2 billion capital raising to fund its acquisition of BankWest.
At the close CBA shares were off 6% at $42.40 after being as low as $39.20, down more than 13% from Tuesday’s close of $45.15.
That was after the CBA had said it successfully completed its share placement to fund the $2.1 billion BankWest acquisition at a price of $38, a discount that reflected the size of speed of the deal, and the nervousness in capital markets at the moment.
As a result the bank’s sharp fall hit the overall market hard, causing much of the early 2.4% drop in the indexes. As the CBA’s share price recovered during the day, the overall market bottomed out and edged higher.
It still ended negative though.
CBA said it was comfortable with the current range of analysts’ cash forecasts for fiscal 2009, which are for a net profit of between $4.399 billion and $4.9 billion.
CBA said the placement involved the issue of 52.6 million new ordinary shares.
It said the placement had been oversubscribed and had strong, broad-based support from the group’s existing institutional shareholder base as well as a number of new shareholders.
It said the new shares will represent around 4% of the group’s existing issued share capital, and are expected to be issued and allotted on October 17.
CBA chief financial officer David Craig said the placement was a great result for all of its shareholders in a challenging market.
"It ensures the group remains strong in uncertain times with our ratings and capital ratios maintained after the acquisition of BankWest and St Andrew’s," Mr Craig said.
But analysts at Goldman Sachs JBWere took a different view.
While liking the well-priced nature of the buy, they warned against customer attrition and the dangers of poor execution of the merger by the CBA
And they also pointed out that the CBA was trading at a big premium to the rest of the sector and investors could find better value elsewhere.
In fact it was a bit of damning with faint praise.
"Whilst this is a solid transaction, we have identified the following risks that accompany this deal as being, i) risk of customer attrition, ii) additional funding risk, iii) overexposure to a slowing WA economy and iv) standard integration risk (e.g. systems/processes).
"In our view risk of attrition and funding are the major concerns. Attrition could be high should CBA change BWA products and pricing in interstate areas. CBA has to fund ~$14.5bn of debt that is currently provided by HBOS Plc to BWA. It has a 6-month window from completion.
"We do believe that it is still a very good purchase for CBA given it was able to pick up some decent assets below book value.
“That said, strategically and financially this deal is not transformational with the deal not filling any strategic gaps / ambitions and is only mildly EPS accretive in the first 3 years. As such, with CBA already trading at a 43% FY09 PER premium to pers (pre equity raising and ex CBA), we see better value elsewhere in the sector."
That’s probably a fair enough view from the market. BankWest might produce upwards of $200 million in extra earnings by next year or the year after, depending on the integration, customer retention and the health of the economy.
What this doesn’t fix is the still apparent below trend growth in lending that the banks are expecting over the next year.
The credit figures from the RBA, building approvals and data on credit card use all tell us that consumers have pulled their heads in. The turmoil and confusion in markets won’t improve that (as we saw with the latest consumer confidence figures).
The CBA got BankWest at a steal, but the more sensible deal might have been Suncorp’s Metway business and wealth management arm.
There are far more people in Queensland, it’s got a more diversified base than WA. More people, faster growth and a bigger and more widely spread business mix means more chance of getting good growth.
In WA, if resources catch a cold, the state gets hit. And that is exactly what’s happening right now. HBOS was starting BankWest expanding out of WA to the Eastern States for one very good reason: diversify and try and grab share in bigger marketplaces.
The chaps at Goldman Sachs are right to be a bit sceptical of the deal, especially on value ground.
Meanwhile shares in small regional, Bank of Queensland rose after it reported a 2% fall in profit for the year to September 31.
The shares jumped 50c at one stage to a day’s high of $12.000, before settling back to around $11.90, up 40c, or 3.5%.
The Brisbane-based bank reported net profit for 2008 of $126.8 million on revenue up 14% to $570.6 million.
In early trade, Bank of Queensland shares rose 4.35%, or 50c, to $12.00.
Bank of Queensland said normalised net profit was $155.4 million, up 46% on 2007.
"BOQ today announced a record normalised cash profit after tax of $155.4 million for the 2007/08 financial year, an increase of 46% on last year, which flowed through to growth in normalised cash diluted earnings per share of 11%, after allowing for the Home Building Society acquisition,” Mr Liddy said.
And that’s the better indication of just how well the bank did. According to figures worked out by Bloomberg, the bank’s second half profit fell 15%.
Bank managing director David Liddy said in a statement that BOQ had "no material direct exposures to stressed local or
