CBA facing $2bn hit from buy now pay later play Klarna

The Commonwealth Bank is facing a $2 billion hit on its investment in buy now pay later operator Klarna, with the Swedish group’s valuation set to be slashed by up to 85 per cent in its latest capital raising.

Klarna is finalising plans to raise up to $US650 million, according to widespread media reports in Europe and the US, at a valuation of around $US6.5 billion. The privately held company was valued as high as $46.5 billion just a year ago when it last raised capital.

CBA invested $100 million for a 2 per cent stake in Klarna in 2019, valuing the business at about $5 billion. The bank invested another $200 million in the company in early 2020. The investments came amid heightened concerns within the banking industry about the rise of buy now pay later platforms such as Afterpay, and their potential to disrupt the payments and credit card markets.

But surging inflation and rising interest rates have sparked a sharp sell-off for ASX listed buy now pay later operators this year, with shares in Zip Co and Sezzle both declining by about 90 per cent.

The settlement of Klarna’s latest round of funding, and its valuation at the level suggested by the media reports, would crystalise a massive loss on the paper value of the Commonwealth Bank’s stake, according to Morgan Stanley’s Richard Wiles.

In its most recent accounts, CBA valued its Klarna stake at just under $2.5 billion, down from $2.7 billion as of June 30 last year.

“An 85 per cent year-on-year reduction in the value of Klarna suggested by the media report would imply a writedown of around $2 billion in the value of CBA’s stake to around $400 million,” said the research note from Wiles.

He said there is a possibility that the bank will write down the value of its stake in its 2022 financial year accounts for the year ending June 30.

Any writedown will not impact on the bank’s earnings as the valuation is taken through reserves not reflected as a gain or loss on its income statement.