Some Sweet Bargains At The Lolly Counter

Sydney Morning Herald

Thursday October 9, 2008

Michael West

RALPH NORRIS is like the kid in the lolly shop ... during a lolly run-out sale.

Not long after the Commonwealth Bank chief had announced the acquisition of BankWest from HBOS yesterday, he was telling analysts that CBA was still in the field to buy Suncorp-Metway, too. ANZ and NAB are also contenders.

He's smacking his chops, and no wonder. CBA is paying 20 per cent below book value for an asset which dominates its market, whereas Westpac is forking out 2.7 times book value for St George.

Bargains like this don't come up too often. Norris is vying for the mantle of chief executive of the top bank in the country - at least in terms of the stock price - with Westpac's Gail Kelly.

Kelly's move on her alma mater St George looked smart at the time. Now it is clear she is paying too much. True, St George is a bigger and better asset than BankWest (assuming it could fund itself in the present market).

And true, on a price/earnings basis, the value differential is a gap rather than a chasm. Overpaying, however, in a climate of slower credit growth, high funding costs and bad-debt blow-ups will drag on performance.

CBA is paying 12.3 times current year earnings for BankWest, compared with Westpac's stated 13.4 times multiple for the Happy Dragon, whose moniker should now be the Lucky Dragon. Its earnings numbers and market guidance seem suspiciously rosy.

Thanks to another night of plunging asset prices and paralysis in the US interbank markets, no bank in the world can refinance on reasonable terms right now.

The market for banks then could hardly be more distressed and, while things could get worse still, the time for pouncing on a troubled asset is now.

Despite Suncorp's efforts to spin its predicament as being one of a high-quality offering which has suddenly and fortuitously attracted a wave of bidders, the reality is this is a bank in turmoil.

It derives half its funding from commercial paper markets - which have vaporised - and is getting smacked by a rise in non-performing loans.

Rather than rule himself out of the bidding for Suncorp due to a commitment to BankWest, Norris ruled CBA well and truly in at yesterday's briefing.

Meanwhile, here's some research from Precept Investment Actuaries: "We consider CBA has been recently overvalued trading at 13 times FY09 earnings. Our valuation of CBA was $38 prior to the [BankWest] purchase which we have now increased to $40.

"We recommend investors tread cautiously because of the global banking crisis despite the compelling merits of the [BankWest] deal.

"We see further risks to CBA: a possible further deterioration in impaired assets, higher provisioning levels and higher funding costs. We have some reservations over CBA's credit quality, level of provisioning, exposure to commercial property and institutional lending and also funds management earnings pressure.

"A subsequent CBA purchase of Suncorp would be negative in our opinion because of the Suncorp's property and credit exposures and because of the operational complexity and risks arising out of the triple tasks of core systems rebuild as well as two major merger integrations.

"We suggest that investors should not pay above $40 for CBA post-deal."

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