The Commonwealth Bank is now too big to fail now, if ever we ever needed it confirmed
The CBA is buying the Australian assets of struggling UK lender, HBOS at a knockdown cost of $A2.1 billion, and raising $2 billion in fresh capital from the market and shareholders.
HBOS Australia’s main asset is the Perth-based Bankwest, and the St Andrews financial services offshoot.
Its UK parent is in trouble and the sale to the CBA was a ‘distressed’ deal: more a ‘steal’ than a ‘deal’ for the CBA.
The CBA share price was halted yesterday at $45.15 to allow the $2 billion capital raising to occur.
It’s not that the CBA is a marginal player either getting bigger: it already dominates the deposits market and home mortgage markets (Home mortgages are important assets because they take less capital than other forms of lending).
As a result after buying BankWest, the CBA will be a giant with 33.7% of the deposits market and 22.7% of the home loan market. That will put it back in front of Westpac and after its merger with St George.
So perhaps we need greater control and regulations to stop it and its managers abusing the dominant position and the one day losing their head in some orgy of credit giveaways of the type we saw in the US a few years ago.
The CBA had an off balance sheet conduit which they quickly closed in the last quarter of 2007 and brought the assets and liabilities back on to the balance sheet when they couldn’t sell them all.
Conduits like that held by banks in the US, UK, France, Ireland, China, Germany and elsewhere created many of the early problems in the crunch as underlying assets went bad, short term loans could not be rolled over and huge losses had to be taken.
Our banks were lucky; they were late into the rort which was designed to boost yield and returns and of course bottom line earnings, and management bonuses.
But as we found Tuesday night the CBA is only passing through 0.80% of the 1% rate cut from the Reserve Bank.
So we are left with the situation of the Bank buying BankWest and boasting about carrying "surplus capital", but the nation’s biggest home lender won’t pass on the full 100 basis point cut in official interest rates.
According to recent research from Merrill Lynch and ABN Amro they Commonwealth Bank would have had to pay as much as $A4 billion for the two units for the assets in HBOS they have bought.
That’s caused some analysts to wonder about the quality of the assets being bought and the profitability of the two groups, especially Bankwest.
But these analysts failed to understand that HBOS is a forced seller: it’s being merged into Lloyds TSB in London to save it. Haven’t these analysts been through a recession before where there are forced or distressed asset sales?
HBOS Australia is clearly one.
But not all of HBOS Australia is being bought: the asset financier, Capital Finance wasn’t mentioned in the CBA announcement.
Capital was one of the lenders to the troubled Raptis property group on Queensland’s Gold Coast that’s looking for finance after capital put receivers into entities associated with Raptis’ big project at Southport.
The future ownership of Capital remains unclear, but if it’s HBOS in Scotland, it will end up in Lloyds and probably on the market next year.
The Commonwealth Bank got a bargain: it paid 0.8 times book value for the companies it is buying off HBOS. That’s less than half the average valuation in the past nine Australian bank deals, according to Commonwealth’s market briefing.
The Commonwealth said while it had been talking to Suncorp about its Metway banking and the wealth management business, it was no longer involved.
HBOS shares dropped 41% in London on Tuesday after news of the UK Government’s proposed bank bailout fund was leaked. That took its share price fall for the year so far to 88%.
That makes the CBA’s buy a very forced ‘steal’, not a ‘deal’.
The only factor that could hold it up will be the ACCC.
