CBA facing $2bn Klarna writedown amid BNPL woes

Banking giant CBA is set for an eye-watering $2bn writedown on its stake in Swedish BNPL group Klarna – less than a year after highlighting a five-fold surge on the initial punt.

CBA CEO Matt Comyn has spoken on “strategic alignment” with Klarna in the past. Picture: Adam Yip

The Commonwealth Bank faces a $2bn writedown in its 5.5 per cent stake in Klarna after the buy now, pay later giant embarked on a bid to raise fresh capital at a significantly lower valuation than earlier rounds, Morgan Stanley says.

CBA first invested $US100m ($147m) for a 1.8 per cent stake in Klarna before increasing its holdings by $US200m in early 2020.

Klarna and the bank have jointly funded and share ownership in the local BNPL business. CBA’s stake was valued at $2.4bn in its latest financial report, released in February, down $100m.

But analysts at Morgan Stanley, in a brief note to clients, said a cut in Klarna’s valuation at a fundraising round – from $US46bn to only $US6.5bn – would have a significant impact on CBA.

“CBA values Klarna ’based on a methodology leveraging revenue multiples of market listed comparable companies’ and it used a multiple of 28x” of first-half 2022 earnings, wrote Morgan Stanley’s Richard Wiles. “All else equal, an 85 per cent year on year reduction in the value of Klarna … would imply a writedown of $2bn in the value of CBA’s stake to $0.4bn.”

In a report at the weekend, the Wall Street Journal reported Klarna was set to raise fresh capital at the lower valuation citing people with direct knowledge of the deal.

The $US600m deal included Sequoia Capital and Abu Dhabi’s Mubadala, the publication said.

An funding round just one year ago, was led by SoftBank and valued Klarna at significantly higher.

CBA had in 2020 valued its ownership in Klarna at $506m.

“Any change in the valuation is taken through reserves, not through the income statement,” Morgan Stanley’s Mr Wiles noted.

“A $2bn writedown would not impact capital, but it would reduce book value per share by $1.20 or 2.5 per cent. This is not reflected in our forecasts,” he added.

Morgan Stanley has a $79 per share price target on CBA, reflecting the rising risk of recession in Australia and New Zealand and its view of the implications for banks’ earnings and returns.

Commonwealth Bank CEO Matt Comyn

CBA shares fell 0.2 per cent on Tuesday – or 22c – to $91.23.

The BNPL sector has been under significant strain in recent months amid rising inflation, interest rate hikes, and concerns from investors about the lofty valuations and earnings forecasts by some companies.

Block, which now owns Afterpay and is one of Klarna’s largest rivals, has seen its share price slide more than 46.5 per cent – or $82.28 – in the last six months alone.

A far smaller operation, the ASX-listed fintech Openpay, earlier this month said it would exit the US market entirely after failing to find co-investors for its business as initially planned.

“Given the current macroeconomic and public market conditions, together with the likely ongoing capital investment required in the US to fund its progress for an extended period, Openpay has decided to pause its existing US operations indefinitely and cease loan originations on the Opy USA platform,” the company said on July 1.

And another ASX-listed group, Humm, in June warned its BNPL business was under “significant pressure” – with the division’s cash net profit down 61 per cent for the year-to-date at the end of May.

In an extraordinary move to try and seal the sale of that business to Latitude, Humm told the ASX in May that the division had “not been profitable” for four months. “This is a materially lower result than for the comparable period last year,” the company said in a statement at the time.

Despite this, a deteriorating market for finance-related companies led to Humm and Latitude abandoning the deal shortly after.

Humm shares have fallen more than 41.3 per cent in the last month. They closed at 48c.

Klarna, in May, said it would cut hundreds of jobs – up to 700 – as it attempted to become profitable. “I am no stranger to sharing good and bad news. However, today is the hardest one to date,” Klarna chief executive Sebastian Siemiatkowski wrote in a message to employees at the time.

“When we set our business plans for 2022 in the autumn of last year, it was a very different world than the one we are in today,” he said. “Since then, we have seen a tragic and unnecessary war in Ukraine unfold, a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession.”