Cba Facing Debt Disclosure Probe

The Age

Saturday December 20, 2008

Eric Johnston

THE corporate regulator will go ahead with an investigation into Commonwealth Bank's possible breach of disclosure rules following this week's botched $2billion capital raising.

The bank's board is also believed to have demanded its own report into the affair as pressure rises on CBA chief financial officer David Craig to step aside following claims of sloppy disclosure.

Despite mounting criticism, CBA was digging in yesterday, declaring it had no need to release this week's warning on a rising level of bad debt to investors any earlier because it did not consider the information significant.

But it is believed the banking giant has failed to convince the ASX that no rules were broken when it tried to warn a small group of investors about bad debt levels before it made the information public.

One analyst said this was the second strike for Mr Craig. During a recent quarterly update, he was criticised for resisting the topping-up of the bank's provisions despite a clear deterioration in some of its high-profile exposures.

While the latest warning - issued as part of the bank's share placement on Wednesday - did not make it to investors until after the news was released generally, CBA has attracted criticism for attempting to stagger its disclosure.

CBA this week confirmed it had intended to warn some investors of the higher impairment charges and blamed its broker, Merrill Lynch, for failing to pass this information on. Merrill has rejected this version of events.

It is believed the ASX is preparing a brief for the matter to be referred to ASIC.

Under ASX rules, companies must disclose any information about operations that could reasonably be assumed to have a material effect on the share price as soon they become aware of it.

In response to a query from the ASX, CBA said yesterday it did not consider the revised impairment expense to be "material to the company".

Rather, the expense "was an estimate which is made in the context of an uncertain economic environment", CBA said.

Analysts rejected this claim, saying the revised bad debt estimate wiped hundreds of millions from the bank's pre-tax earnings.

An ASX spokesman declined to comment on the adequacy of CBA's explanation but said the exchange took potential breaches seriously.

"Where we believe there could be a breach of continuous disclosure rules, we refer the matter to ASIC for further investigation," the ASX spokesman said. An ASIC spokeswoman declined to comment.

Several big-name companies have recently fallen foul of the continuous disclosure rules.

Earlier this year, Rio Tinto was hit with a $100,000 fine for sloppy disclosure in relation to its $US38 billion acquisition of Alcan. Promina was hit with a similar fine for being slow to release details of a takeover approach from Suncorp-Metway.

After completing its accelerated placement to a select group of large fund managers on Tuesday, CBA issued a statement to the ASX after 7pm confirming details of the $2 billion share issue.

The statement also contained a warning that its bad-debt charge would rise to about 0.6 per cent of its gross loan and acceptances. Just five weeks earlier, CBA had said this figure would be between 0.4 per cent and 0.5 per cent. But a deteriorating credit environment and the bank's exposure to a string of struggling companies, including ABC Learning and Babcock & Brown, had prompted the bank to raise its estimates on potential lending losses.

Following confirmation, CBA this week downgraded its earnings forecasts by as much as 15per cent.

By outlining a higher bad and doubtful-debt charge from its guidance just five weeks earlier, CBA had "effectively provided a profit warning", ABN Amro analyst Jarrod Martin said.

Others, including JPMorgan analyst Brian Johnson, forecast that CBA's bad-debt charge could rise to $2.7 billion in 2008-09, more than $1.1 billion above his previous estimate.

Mr Johnson lowered his recommendation on the stock to "underweight", partly because of the increased lending-loss charge.

CBA's shares this week slumped as much as 9 per cent - one of its biggest single-day losses - after it resumed trading following a one-day halt.

"What's the scoreboard telling you? That's material," one analyst said.

THE WHOLE TRUTH ... IF A LITTLE LATE

RECENT BREACHES OF CONTINUOUS DISCLOSURE RULES

June 5, 2008

Rio Tinto forced to pay a $100,000 fine after failing to comply with continuous disclosure rules. It failed to notify the ASX over its planned $US38.1billion acquisition move on Alcan in 2007, even though the transaction had been foreshadowed in a US news report.

March 20, 2007

General insurer Promina pays a $100,000 fine after failing to inform the ASX that it had received a takeover proposal from Suncorp-Metway. ASIC claimed Promina became aware of the proposal at 6pm on October 10, 2006, and became obliged to disclose the proposal to the market at noon the the next day, after publication of a report about the pending deal.