CBA in $10bn wealth, broking spin-off

The Australian 12:00am June 26, 2018

Michael Roddan

Commonwealth Bank has rung the bell on vertical integration, unwinding itself from a near-two decade cycle of cross-ownership of wealth management and mortgage broking businesses as it launches a new $10 billion spin-off that will emerge as one of the top 50 companies in the sharemarket.

The nation’s largest bank yesterday tore up plans for a proposed float of its $207bn global asset management business in favour of a far more dramatic demerger involving its Aussie Home Loans mortgage broker, its planning licensees Count Financial and Financial Wisdom and its $135bn Colonial First State superannuation arm.

Existing CBA shareholders will get a share in the new company, named CFS Group, which is likely to be valued at between $7bn and $10bn on the ASX.

The spin-off will allow CBA to focus on its core business of home loans and savings deposits.

CBA chief executive Matt Comyn, who formally took over the scandal-plagued lender in April, said the move was the bank’s response to “continuing shifts” in community expectations and “concerns regarding banks ­owning wealth management businesses”.

The bank also revealed plans for a possible sale of its CommInsure general insurance business, which could fetch up to $1 billion, following last year’s $3.8bn sale of its life insurance unit to Hong Kong’s AIA Group.

The flurry of announcements marks a ramping up of the financial sector’s bid to shake off various wealth management arms that have swamped the major banks with compliance failures, angry customers, expensive remediation programs and a royal commission into financial services. The big four banks have outlined billions of dollars in sales of their life and wealth management operations.

CBA shares fell 2.3 per cent to $72.16 amid investor concern they will be stuck with exposure a wealth company with legacy problems. CBA shares are down 15 per cent over the past year.

John Symond, the founder of Aussie Home Loans who sold the mortgage broking business to CBA for $340m, said the demerger was a more “logical” move than “going down the line with piecemeal” separations.

“From Aussie’s point of view, CBA has allowed us to act independently, notwithstanding comments at the Hayne royal commission,” Mr Symond told The Australian from London. “You’ve got to be seen to be independent from the perception of the consumer. There has been a feeling that vertical integration creates biases and staffs sway more towards the parent company. That hasn’t been the case at Aussie, but that’s why I’m keen to see, if my understanding of this demerger is correct, that it will take care of this conflict.”

Kenneth Hayne’s royal commission into financial services has heard a stream of complaints of poor conduct in the nation’s biggest financial institutions, with sales incentives and cross-ownership driving numerous cases of misconduct.

The new chair of the Australian Securities & Investments Commission, James Shipton, has urged banks to carve off their conflicts of interest before the royal commission reports its recommendations in February, while Treasury has also raised concerns about vertically integrated businesses following the explosive wealth management hearings at the royal commission in April, which sparked the resignation of a series of AMP executives.

The pressure on the cross-selling model looks set to continue. Independent MP Bob Katter, a key proponent of the royal commission, yesterday introduced to parliament a private member’s bill to divide the banks. Mr Katter’s bill, which is unlikely to be legislated, aims to separate retail banking activities from risky wholesale and investment banking. “The situation in Australia is ugly and it is evil and this legislation is needed to overcome those problems,” Mr Katter said.

Professor Kevin Davis, a member of the government’s Financial System Inquiry, said the banks’ move into a wider range of products over the past decade “hasn’t turned out to be the nirvana they thought it would be”. “Incentivising staff to become salespeople while still maintaining appropriate incentive structures has proved to be illusory,” Professor Davis told The Australian.

Already ANZ has struck deals worth nearly $3bn to sell its superannuation and life insurance businesses, and is also pulling back from a drive into Asia by selling a series of minority stakes in foreign banks. National Australia Bank has sold its life insurance business for $2.4bn and plans to offload its MLC wealth management company for an expected $3bn by the end of next year. Beleaguered wealth manager AMP is attempting to sell its life insurance division. The nation’s second-largest bank, Westpac, has bucked the trend and has committed to its BT Financial Group wealth business.

Fund manager George Boubouras said the CBA spin-off was overdue. “It’s easier to spin off all the businesses together than to do it one by one. It’s an easier proposition because it’s also quicker,” Mr Boubouras said.

Shaw & Partners analyst Brett Le Mesurier said while owning the businesses wasn’t the problem, getting an unusually high allocation of new business from a wealth manager was a problem.

“Presumably they got the operations in the first place to earn a disproportionate amount of new business,” Mr Le Mesurier said.

Current CBA shareholders will receive shares in CFS Group proportional to their existing CBA shareholding, while CBA has no intention to own any stake in the new group. Together, the proposed CFS Group had a net profit after tax of more than $500 million last year.