As most investors will be aware, the Commonwealth Bank of Australia (ASX:CBA) is currently under investigation from AUSTRAC for failing to adequately report cash deposits of over $10,000 to the authorities. They have allegedly breached this 53,000 times with a maximum penalty of $18m per breach. As a result, financial professionals have been answering a lot of phone calls from retirees and investors concerned about the financial position of the company.
To get a grasp of what this means for CBA we can look to Wells Fargo (NYS:WFC) in the US who went through a large newsworthy scandal this time last year.
A comparison of the two banks before and after the scandal:
- Both are Domestic focused
- Both traded at premiums to other Banks
- Both were regarded as the best-run and managed big banks in their respective countries
- Both have removed their CEO’s
- Both have lost their Premium
- Both have underperformed the other Banks
Comparison in Charts:
Wells Fargo long held the mantle as the best-run US bank and traded at a premium to its peers. However, after the scandal Mr Market decided that a forward P/E ratio below the others was more appropriate. WFC has also underperformed US banks over the same time period by a wide margin.
Since the Scandal:
Just like WFC, CBA have lost their premium rating and possibly their status as the best-run bank. Unfortunately for CBA shareholders, the trouble might not be over. Recently, WFC CEO Tim Sloan mentioned that the Bank has uncovered more wrongdoing which prompted major WFC shareholder Warren Buffett to say ‘Sometimes there is more than one Cockroach in the Kitchen.’
We could argue about the size of the fine and tell investors that the market value lost is more than any possible fine amount but the BOTTOM LINE is CBA’s reputation that allowed it to trade at a premium to other banks has been severely damaged.
This document has been prepared by Farnam Investment Management Pty Ltd (Farnam) ABN 15 149 971 808 AFS Licence 430574. Australian Unity Funds Management Limited ABN 60 071 497 115 AFS Licence 234454 is the responsible entity of Farnam Managed Accounts. While every care has been taken in the preparation of this document it does not contain any recommendations to buy or sell any particular stock(s) noted. Farnam makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.