Scandal changes ledger among four pillar stocks

Commonwealth Bank’s golden era as the undisputed leader of Australia’s big four bank stocks is in jeopardy.

Commonwealth Bank is expected to report a profit in the order of $9.8bn tomorrow. Picture: Hollie Adams.

Commonwealth Bank’s golden era as the undisputed leader of Australia’s big four bank stocks is in jeopardy as investors digest the potential costs from its latest scandal: an alleged “systemic” breach of money-laundering regulations.

Investors now expect the fortunes of CBA’s traditional rivals — particularly ANZ — may improve as the smaller banks offer a clearer outlook and better value.

Recent data released by Macquarie Research shows CBA’s huge following among local investors had already been cooling ­before the latest spectacular incident, which directly threatens the tenure of bank boss Ian Narev. In the three months of June 30 this year, CBA was the only bank to lose retail investors from its share register, while ANZ, NAB and Westpac all recorded gains.

Fund manager Jamie Nicol of DNR Capital says the money-laundering scandal will be another turn-off for retail shareholders: “Mum and dad investors just don’t like to see bank scandals on the front page ... they are much more likely to act on dramas such as we are seeing at the moment compared to institutional investors.”

Echoing a widely held view among local professional investors, Nicols said yesterday he was not so much concerned with any eventual dollar fine the bank may face as the risk Australia’s most aggressive bank may lose its competitive edge in the months ahead.

Nicols explained that any management reshuffle at the bank could install a more “inward-looking culture” where the remediation of past failures could distract the bank from its core activities.

CBA initially fell by more than 4 per cent when the scandal broke late last week. Yesterday the stock was little changed at $81.52 as the bank released a statement to the stock exchange that suggested any fines relating to the scandal would be “just and appropriate”.

According to Bloomberg figures, among the pool of stockbroking analysts in Australia that track banks, 37.5 per cent have a sell recommendation on CBA, 43.8 per cent have a hold call and just 18 per cent rate it as a buy.

Westpac is the clear favourite among broking analysts — none have a sell call, some 56 per cent have a buy, while the rest have a hold call.

As CBA struggles to contain the scandal, the bank’s key rivals have a rare chance to undermine its premium position among investors.

With key stock ratios neck and neck between ANZ, NAB and Westpac, professional investors are slow to “call” an outstanding winner from the CBA crisis. However, many analysts agree that ANZ under cost-conscious CEO Shayne Elliot is in pole position for an uplift.

The Melbourne-based bank has avoided the heavy exposure Westpac has accumulated in the housing market or the chequered performance of NAB to offer appealing numbers with perhaps the strongest prospects of earnings growth in the medium term.

ANZ rose more than 1 per cent yesterday as investors continued to mark up the bank’s potential ability to lift earnings while cutting costs in the months ahead.

Both Westpac and NAB also offer attractions in the current market as their stock prices remain relatively cheaper than market leader CBA.

Though it offers a lower dividend than any of its peers, CBA has traded at a “premium” in recent years. But the long-standing premier position of the Sydney-based banks is now clearly under threat: the premium had been substantially due to the bank’s outstanding return on equity — a key indicator of a stock’s health and returns.

In the past, CBA has return-on-equity levels touching 20 per cent. More recently, the figure has dwindled to about 17 per cent. Moreover, it is forecast to slide in the years ahead, coming closer to industry norms of about 15 per cent.

As rival banks seek to capitalise on CBA’s embarrassing IT failures, analysts have become more willing to criticise the bank.

Not surprisingly, one of the sharpest notes emerged from a global investment bank that has little to fear from the biggest bank in Australia. New York-based Morgan Stanley issued a biting ­review suggesting: “We believe Austrac’s action raises further concerns about conduct. Potential implications include material penalties, brand damage, higher costs, management changes, adjustments to strategy and further scrutiny from APRA, politicians and the community.”

In contrast to many local brokers who brushed off the material aspect of any potential court fine CBA may face, Morgan Stanley remained circumspect suggesting “ this is very difficult to predict and could depend on many different factors in Austrac’s allegations”.

Until the latest CBA scandal surprise the market, bank stocks had been staging something of a comeback thanks primarily to lighter than expected demands on so-called capital adequacy provisions from the regulator APRA.

There has also been some evidence the housing market could manage to avoid a sharp correction despite widespread fears high household debt would undermine bank profitability.

These improved fundamentals for the banking sector are likely to offset any temporary concerns in relation to current “downside” risks faced by all banks such as a potential slowdown in home loan growth, a lift in bad debt levels or higher risk of regulation particularly the renewed prospect of a banking inquiry.

With CBA expected to report a profit in the order of $9.8 billion tomorrow, analysts are widely expecting a strong set of numbers with a possible upside surprise: At stockbroker Bell Potter, banking analysts TS Lim said he was not overly concerned with any potential fine for CBA in the medium term. “Any fine here will be relatively small relative to the size of the bank,” he said.

Analysts also expect the bank to face a range of questions on the Austrac allegations though it may be much too early for the bank to respond in any substantial way to the money-laundering claims.