Commonwealth Bank chief executive Ralph Norris defended the acquisition of BankWest in late 2008, despite unforseen problems with its loan portfolio.
Commonwealth added 12 basis points to its impairment expense and charged $212 million after-tax against its acquisition profit after conducting a
CBA_profit_tab
legacy portfolio review at BankWest.
This additional expense is recognised in CBA's full-year net profit on a statutory basis. However, it's excluded from the "cash profit".
The impairment expense to gross loans in the BankWest business banking division has jumped from 68 basis points in June 2009 to 248 basis points in December and 590 basis points in the latest half. Of the 590 basis points, 251 points were added as a result of the review.
Over the same period CBA Group impairment expense has moved from 61 basis points of gross loans in June last year to 55 basis points in December and 40 basis points in the latest half. Of the 40 basis points, 12 points were added as a result of the review.
Individual provisions of $956 million against BankWest loans made up the largest part of the bank's individual provisions for the June 2010 half.
Norris said he was not happy about the situation and had replaced the head of business banking and the chief risk officer at BankWest.
But he said the loan problems needed to be seen in context. When Commonwealth made its acquisition of BankWest in October 2008 it reported that it had paid 0.7 times book value and in last year's accounts it booked a gain of $612 million on the acquisition.
Norris said: "This takes the price back to 0.8 times book. It is still a very good buy. If you find any others at that price let me know."
Other metrics at BankWest were positive. Operating income rose 25 per cent to $1.7 billion in the year to June. Expenses were down three per cent. Customer numbers rose from 960,000 to 1.01 million over the same period.
Norris said the loans in question were performing at the time of the acquisition and were still performing. The issue was that the loans had been written on unrealistic security valuations.
The review has covered 1100 individual files (66 per cent of the book). The average size is $8 million and the assets are predominantly east coast properties.