The prudential regulator’s probe into the governance and culture of the Commonwealth Bank will have benefits for investors, despite the “negative headlines”, says Morningstar.
In a communication following the announcement that APRA was launching an investigation into the bank, Morningstar analysts advised investors to “hold” their CBA shares and put a positive spin on the development.
“APRA demonstrated typical common sense announcing a prudential inquiry into governance, culture and accountability issues at [CBA],” the analysts wrote. “Despite the negative headlines, we believe the inquiry is a good outcome and should be welcomed by shareholders.”
The fact that APRA will “not be influenced by political and media hysterics” and will ultimately raise confidence in the bank’s reputation and financial solidity are positive outcomes from the perspective of shareholder value, the document stated.
The worst-case scenario from the inquiry would be a “short-term capital penalty” due to a requirement to potentially raise regulatory capital for a period of time. In addition, Morningstar says the bank continues to face the threat of a royal commission, the chances of which it believes are unchanged by the APRA activity.
As Australia’s most profitable bank, the investment fundamentals remain intact, the document concluded.
“Despite industry headwinds and recent management mis-steps, CBA’s conservative management, diversified revenue stream and strong and stable balance sheet continue to consistently deliver solid financial results,” it said.
However, while the APRA probe will not have an adverse effect on the bank’s proposition as an investable asset, the Morningstar analysts added that “increased regulatory, political and public scrutiny could erode the bank’s pricing power over time”.
The analysis follows global ratings agency S&P warning that the APRA investigation could result in a credit downgrade for the bank.
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