CBA cops $100k fine from ASIC

Commonwealth Bank of Australia has paid a $100,000 fine from the corporate watchdog for an alleged failure to disclose a hike in its 2009 bad debt forecast ahead of a controversial $2 billion capital raising.

CBA on Wednesday said that while it agreed to pay the penalty imposed by the Australian Securities and Investments Commission, that payment was not an admission of liability.

Nor could the bank's agreement to pay be taken as a finding that CBA had contravened the Corporations Act and its continuous disclosure rules.

ASIC had alleged CBA failed to notify the Australian Securities Exchange (ASX) after it became aware that its full year loan impairment expense (LIE) to gross loans and acceptances ratio to June 30, 2009 would rise by a material amount.

Last November, CBA notified the ASX its exposure to collapsed Lehman Brothers, Allco Finance Group Ltd and ABC Learning Centres Ltd would result in a full year 2009 LIE of between 40 and 50 basis points.

On December 16, 2008, the bank told the ASX the LIE ratio for 2009 would be around 60 basis points - several hours after announcing a $1.65 billion capital raising.

The capital raising had to be revised and replaced after some investors complained they had not been aware the bank had changed its LIE forecast before buying into the placement.

CBA changed investment banks, handing the deal to UBS which underwrote a new $1.65 billion placement at $26 a share, down from the initial price of $27 per share.

ASIC said on Wednesday that it believed CBA became aware of the changed forecast at 1500 AEDT on December 16 and was therefore obliged to immediately notify the ASX of what ASIC says was a significant deterioration in the expected LIE ratio, and therefore, price sensitive information.

ASIC says CBA did not notify the ASX of the change until about 7.14pm on December 16.

ASIC also said CBA has elected to comply with the infringement notice but, as stated in the Act, that compliance was not an admission of guilt or liability.

CBA chief executive Ralph Norris said on Wednesday: "Loan impairment expense is a single line item in the group's profit and loss statement and cannot be considered in isolation."

"As noted in our ASX announcement at the time, we were experiencing strong volume and revenue growth which, in our view, significantly offset the forecast increase in loan impairment expense, such that the net impact on our overall profitability was not material."

Full ASIC announcement below:

Australian Securities & Investments Commission (ASIC)
MEDIA RELEASE
Wednesday 14 October 2009

COMMONWEALTH BANK PAYS $100,000 PENALTY

The Commonwealth Bank of Australia (CBA) today paid a penalty of $100,000 to the Australian Securities and Investments Commission (ASIC) relating to its alleged failure to comply with the continuous disclosure obligations in the Corporations Act (the Act).

ASIC issued an infringement notice to CBA alleging they had failed to notify the Australian Securities Exchange (ASX) after becoming aware of information about its expected loan impairment expense (LIE) to gross loans and acceptances ratio for the financial year ending 30 June 2009.

On 13 November 2008 CBA released an announcement to ASX that stated, among other matters: 'the Group's exposure to Lehman Brothers, Allco Finance Group Limited and ABC Learning Centres Limited will result in significantly higher first half provisions' and 'Full year impairment expense is expected to be between 40 and 50 basis points, with the majority in the first half.'

By about 3pm (AEDT) on 16 December 2008, ASIC believes that CBA became aware of the following information: '[CBA] expects ... the full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half [for the financial year ending 30 June 2009].'

ASIC believes that CBA was obliged to immediately notify ASX with the above information, as it was a significant deterioration in its expected LIE ratio and was, therefore, price sensitive information.

CBA did not notify the ASX until about 7:14pm on 16 December 2008, when it released an announcement which stated: '[CBA's] full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half.'

CBA has elected to comply with the infringement notice. As stated in the Act, compliance with the notice is not an admission of guilt or liability. CBA is not regarded as having contravened subsection 674(2) of the Act (obligation of an entity to provide material information to the market operator).

Further information about ASIC's administration of infringement notices is available at http://www.asic.gov.au/clerp9 under 'continuous disclosure'.

Extract of infringement notice

The Facts

On or by 13 November 2008, CBA was aware that its expected LIE for the full financial year ending 30 June 2009 was estimated to be $1,867 million.

On 13 November 2008 CBA released an announcement to ASX entitled 'Commonwealth Bank of Australia - September Quarter 2008 Trading Update' in which CBA stated, among other matters: 'the Group's exposure to Lehman Brothers, Allco Finance Group Limited and ABC Learning Centres Limited will result in significantly higher first half provisions' and 'Full year Impairment Expense is expected to be between 40 and 50 basis points, with the majority in the first half.'

On 16 December 2008, CBA attempted a $2 billion capital raising, including an institutional placement at $27 per share, managed by Merrill Lynch. In the afternoon of 16 December 2008, Merrill Lynch offered to CBA to make confidential soundings of major CBA shareholders to ascertain interest in this placement.

Merrill Lynch undertook the confidential soundings and advised CBA of the outcome. By about 3pm on 16 December 2008, following the completion of analysis in relation to its projected LIE for 2009, CBA was aware of a document entitled 'Credit Quality Analysis', which showed that CBA's projected LIE to gross loans and acceptances for the financial year ending 30 June 2009 would equate to about 61 basis points, with the majority in the first half.

By reason of foregoing, from about 3pm on 16 December 2008, CBA came into possession of the following information: '[CBA] expects ... the full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half [for the financial year ending 30 June 2009]' (the Information).'

About 3:59pm on 16 December 2008 CBA forwarded the Information to Merrill Lynch in a draft media release in the course of discussions about its attempted capital raising.

About 7:10pm on 16 December 2008, CBA forwarded an announcement to ASX entitled 'Commonwealth Bank Capital Raising' in which CBA stated that it had completed a $2.0 billion capital raising, including an institutional placement at $27 per share, which had been managed by Merrill Lynch.

It also stated that: 'the full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half' (the 16 December Announcement).'

At about 7:14pm on 16 December 2008, ASX released a CBA announcement entitled 'Commonwealth Bank Capital Raising', which stated, among other matters, that:

'the full year loan impairment expense to gross loans and acceptances is now expected to be around sixty basis points, with the majority in the first half' (the 16 December Announcement).'

On 17 December 2008 ASX sent a letter to CBA (ASX Aware Letter). The ASX Aware letter referred to the 16 December 2008 Announcement and asked CBA, among other matters, whether it considered that information in the 16 December 2008 Announcement was material, when it first became aware of the same and to confirm that CBA was in compliance with ASX Listing Rule 3.1.

The ASX Aware Letter requested CBA provide a response in a form suitable for release to the market.

On 18 December 2008 CBA released an announcement to ASX which stated that: 'Sixty basis points of estimated average gross loans and acceptances would be approximately $2.5 billion' and that '... our previously advised forty to fifty basis point [for impairment expenses] which would approximate $1.7 - $2.1 billion.'

On 19 December 2008 CBA responded to the ASX Aware Letter of 17 December 2008, stating that CBA became aware of the LIE as reported in the 16 December 2008 Announcement on 16 December 2008.

The Contravention

This Infringement Notice has been issued because ASIC has reasonable grounds to believe that CBA contravened subsection 674(2) of the Act in the period from 3.00pm or shortly thereafter on 16 December 2008 to 7.10pm on 16 December 2008 (at which time CBA released the 16 December Announcement to ASX), in that:
(a) CBA is an entity to which subsection 674(2) of the Act applies.
(b) At 3pm on 16 December 2008, CBA was aware of the Information.
(c) Listing Rule 3.1 of the ASX Listing Rules requires CBA to immediately tell ASX of the Information once CBA is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. ASIC is of the view that CBA was required to tell ASX of the Information when it became aware of it at about 3pm on 16 December 2008.
(d) The Information was information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of securities of CBA, because:

On 13 November 2008, CBA announced that its 2009 full year impairment expense was expected to be between 40 and 50 basis points.

From about 3pm on 16 December 2008, CBA was aware that its 2009 full year LIE was expected to be $2,494 million, an increase of about $600 million over its expected LIE as at 13 November 2008.

CBA was aware at this time that the expected LIE to gross loans and acceptances had increased to around 60 basis points.

Unless offset by other factors, the increase in CBA's expected LIE to gross loan and acceptances for the financial year ending 30 June 2009 from between 40 and 50 basis points to around 60 basis points was capable of adversely affecting CBA's forecasted end of year net profit by between 5% and 7%.

Having regard to the financial and economic conditions prevailing at the time, there was a heightened interest in the market regarding impairment of bank loan assets and bank profitability.

In the afternoon of 16 December 2008, Merrill Lynch made confidential soundings of major CBA shareholders to ascertain interest in a capital raising on that day.

(e) By reason of the matters referred to in paragraph (d) above, if it were generally available, the Information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of CBA securities.
(f) From 3pm on 16 December 2008, ASX Listing rule 3.1A (the exception to ASX Listing rule 3.1) no longer applied to the Information because, in view of the matters referred to in paragraph (d) above, a reasonable person would have expected the Information to be disclosed to ASX.
(g) Consequently, from 3pm on 16 December 2008, ASX Listing Rule 3.1 required CBA to tell ASX of the Information.
(h) Between 3pm and 7.10pm on 16 December 2008, the Information was not generally available.
(i) CBA did not tell the ASX of the Information until about 7.10pm on 16 December 2008.