Commonwealth Bank’s money laundering compliance scandal threatens to cost the lender its position as the country’s top-rated banking stock as investors try to value the hit to its brand.
Ahead of a prudential inquiry into the country’s biggest lender, some analysts predict CBA will lose its position as a market darling, pointing to examples where other banks’ shares have lagged rivals after suffering a big hit to their reputations.
As well as being the country’s biggest bank, CBA has long fetched a premium on the sharemarket because of its financial strength and industry-leading profitability.
This higher rating of CBA is reflected in the stock’s price-to-earnings (P/E) ratio, a key measure for valuing shares.
However, bank watchers are now questioning whether this premium will be eroded by the potential costs, management changes and distraction created by the allegations from Austrac that it repeatedly breached anti-money laundering laws.
In a note to clients, Morningstar analyst David Ellis said CBA’s premium to its peers had been “all but extinguished” since the Austrac allegations broke earlier this month.
He said CBA’s P/E multiple had fallen from close to 14 times to about 13 times, only marginally ahead of rival banks Westpac, ANZ Bank and National Bank.
Since Austrac filed its claim against CBA on August 3, the bank’s share price has fallen about 10 per cent, compared with a fall of about 2.6 per cent in the ASX 200 banks index.
While CBA shares did go ex-dividend during this period, lowering the share price, they have still lagged rivals significantly after accounting for this fact.
CBA lost its crown as the nation’s biggest company by market capitalisation on Tuesday as its shares slid another 1.2 per cent to $75.73. BHP, which has been boosted by a rally in global metals prices, wrested back the title with a market cap of $135.8 billion compared with CBA’s $131.2 billion.
Regal Funds Management portfolio manager Omkar Joshi predicted CBA shares would lag those of rival banks over the next six to 12 months, as a result of the Austrac allegations and the n Prudential Regulation Authority’s (APRA) public inquiry into the lending giant’s culture, governance and accountability frameworks.
“They’ve de-rated a little bit. There will be more of that going forward, they are still trading at a premium to peers,” he said.
Although the APRA inquiry may have little impact on the bank’s profits, Mr Joshi said investors would be wary towards the stock and invest in other banks instead while there was uncertainty over the potential fine facing CBA, management changes and other consequences of APRA’s inquiry.
“If you want to own a major bank, you look at all four of them, and CBA is the one that sticks out as having plenty of unresolved issues,” Mr Joshi said.
Credit Suisse analysts led by Jarrod Martin said CBA’s premium to rival lenders had narrowed and could fall further, based on what has occurred with other crisis-hit banks.
The analysts pointed to the experience of National Bank, which went from being the country’s top bank in the late 1990s to a serial laggard, after several failed expansions overseas and a currency options trading losses scandal in 2003-04.
The report said NAB shares had fetched a premium to rivals in the 1990s, but this turned into a significant discount that was still reflected in the pricing of NAB shares today.
While CBA shares were still fetching a premium, the analysts said the Austrac scandal had the potential to strip CBA of its market darling status, given it had had “more than its fair share of conduct related matters” in recent years.
“This could be the ‘straw that breaks the camel’s back’ for CBA, potentially bringing about a substantial and sustained stock de-rating,” say the analysts, who have a “neutral” rating on the stock.
Other investors point out that the Austrac allegations, while very serious, are unlikely to affect its day-to-day operations taking deposits and writing loans.
The bank also has a solid base of retail shareholders who value the bank’s high dividends, and some question the extent to which these shareholders will be more reluctant to invest in CBA in response to the Austrac scandal.