Commonwealth Bank shares took a hiding yesterday after the company’s first quarter update saw first half earnings estimates (and those for the full year) put under enormous pressure.
The shares hit a new 52 week low of $32.88 in trading before closing down 6% at $33, the lowest it has been since April, 2005.
The downward pressure on first half earnings is coming from rising bad debts from failing companies which are starting to accelerate.
Losses on failed debts from Lehman Brothers Holdings, Allco Finance Group and ABC Learning Centres will produce a sharp rise in impaired loans which already rose to $650 million from $470 million in the first quarter.
‘While there is no evidence of systemic credit issues, the group’s exposure to Lehman Brothers, Allco Finance Group and ABC Learning Centres will result in significantly higher first half provisions,” the bank said in the statement today delivered to the AGM in Melbourne this afternoon. It was released to the market before trading started this morning.
While it did not give an estimate for bad-debt provisions, last week, it said it had $240 million in senior debt exposure to collapsed child-care group ABC Learning Centres and a $170 million exposure to collapsed investment firm Allco. The gross exposure to Lehman was put at $100 million in a statement a month ago.
The CBA said that impaired expenses will be the equivalent of as much as 0.5% of total lending in the 2009 financial year, double the level of a 2007, with the majority taken in the first half.
Analysts say the bank’s year-on-year bad debt charge could rise to $2.3 billion in 2009, depending on the eventual size of the bill for the company failures. (Watch Centro to really boost the bad news).
UBS told clients that the higher level of bad debts could slice as much as 9% from the Commonwealth’s cash earnings per share for the full year – or $600 million from its record profits of $4.79 billion last year.
First quarter bad debts jumped to $930 million in 2008 from $496 million a year earlier. Bad debts as a proportion of loans increased to 0.26% from 0.14% a year earlier.
An update on its capital and risk revealed that loans past 90 days arrears had jumped 10% in the quarter to more than $1.23 billion, from $1.11 billion. Corporate was the big increase in percentage terms, but there was a $59 million, or 7%, rise in residential loans past 90 days.
But loans that actually went bad in the quarter (from being in arrears to being impaired) saw a fall in residential and retail losses.
Residential loans classified as impaired fell to $184 million from $195 million and impaired retail loans fell to $12 million from $18 million. Impaired corporate loans jumped $180 million to $650 million in the quarter.
So on that basis, ordinary Australians are better credit risks than corporates and will do anything to keep the loans performing, and banks like the CBA will try and help because they are fearful of the bad publicity.
(Problems at Centro could see the bad debt situation rise next year as the exposure to the troubled retailing group is understood to be much larger than to Allco or ABC.)
CEO Ralph Norris said in the trading update that while the Australian economy has been relatively resilient, it is slowing.
"`Financial performance for the first half of the 2009 financial year will be negatively impacted by increased loan impairment expense,” Norris said. "While there is no evidence of systemic credit issues, the group’s exposure to Lehman Brothers, Allco Finance Group and ABC Learning Centres will result in significantly higher first-half provisions.”
"Liquid assets now total $66 billion, and the Group is well advanced with its 2009 term funding programme, which is approximately 40 per cent completed," the bank said. It had $26 billion in self securitised mortgages which it can deal to the Reserve Bank in exchange for six month or 12 month funding.
Mr Norris didn’t give any estimate for the impact on first half earnings in the update. The CBA earned a first half cash profit of $2.385 billion for the December half of 2008, up 4%. It’s hard to see that being repeated this half.
"Despite difficult environmental and market conditions, the underlying business performance of the Commonwealth Bank of Australia ("the Group") was relatively strong through the September 2008 quarter.
"However, financial performance for the first half of the 2009 financial year will be negatively impacted by increased Loan Impairment Expense.
"To September, the Group has increased its home loan market share in 18 consecutive months.
"Growth in deposits has been particularly strong, with total deposits growing well ahead of system and business deposits growing at almost twice the market rate.
"The Group continues to maintain a cautious approach in the current environment, with emphasis on maintaining strong capital, funding and liquidity positions.
"Liquid assets now total $66 billion, and the Group is well advanced with its 2009 term funding programme, which is approximately 40 per cent completed.
"While there is no evidence of systemic credit issues, the Group’s exposure to Lehman Brothers, Allco Finance Group Limited and ABC Learning Centres Limited will result in significantly higher first half provisions.
"Overall credit quality in the Group’s consumer and commercial books remains sound, with little sign of material deterioration in key indicators.
"The Group’s low-risk, domestically focused strategy remains on
