CBA gave the market something of a surprise on 25 June when it announced it would demerge its financial advice, mortgage broking and funds management businesses.
The news of the demerger was at odds with CBA’s announcement on 17 April that it intended to pursue an IPO of Colonial First State Global Asset Management (CFSGAM) by the end of 2018.
Instead, CBA will demerge CFSGAM as a new company which will also include Colonial First State, Count Financial, Financial Wisdom and Aussie Home Loans.
The bank’s salaried advice channel, Commonwealth Financial Planning, will remain part of the core bank.
CBA has also announced it is undertaking a review of its general insurance business with the intention of pursuing a potential sale or a “partnership with a specialist insurance provider”.
The new entity, which will be called CFS Group, will be owned by existing CBA shareholders and chaired by former Suncorp chief executive John Mulcahy – with a CEO to be announced.
Back-of-the-envelope calculations put the market capitalisation of CFS Group at approximately $5-7 billion, assuming $500 million of earnings and a PE of 10-14 times.
That would put the new company somewhere between IOOF (which has a market capitalisation of about $3 billion) and AMP (which sits at around $10.5 billion).
CBA’s chief executive is clearly putting CFS Group in the shop window, but it remains to be seen who the likely buyers would be.
By lumping in Aussie Home Loans with CFSGAM and the financial planning dealer groups, Mr Comyn seems to be limiting the number of potential takers.
Analysts were cautious about the news, with Citi noting that the businesses thrown together within CFS Group were “not a natural fit in a single, demerged entity”.
That said, Citi pointed out that Mr Comyn and CBA’s board will have successfully “liberated” themselves of key businesses that have been the focus of Kenneth Hayne’s royal commission into bank misconduct.
“However, the combination of an unnatural fit of businesses, as well as potential operational changes as a result of the Hayne royal commission recommendations, we expect the new entity to undertake significant strategic change once it becomes independent,” said Citi.
Morgan Stanley said the decision to demerge wealth management and mortgage broking would allow CBA management to exit ‘non-core’ assets and focus on retail banking.
The investment bank said that in combination with managerial appointments – including David Cohen’s move to deputy CEO – the demerger will reduce “strategic uncertainty” within CBA.
“However, we believe this will make 'new CBA' even more exposed to retail banking at the end of the super cycle,” said Morgan Stanley.
Morningstar labelled the demerger as yet another example of an Australian bank shedding its “ugly duckling” businesses – and rewarding shareholders “handsomely” in the process.
“We expect the demerged businesses will benefit from an ability to operate as a specialist wealth manager without the bureaucracy and constraints of being part of a large banking group,” said Morningstar.
The loss of the CFS Group earnings, at $500 million, implies only a 5 per cent reduction in earnings for CBA.
Citi believes the CBA board will be able to maintain its current dividend share trajectory despite the demerger.
“Its dividend payout ratio would rise above 80 per cent, but this brings it in line with major bank peers, like Westpac and NAB,” said Citi.
It remains to be seen how CFS Group will operate as a standalone entity – and who will be interested in acquiring it – but at first blush this is looking to be a canny decision by Matt Comyn, who has had a tumultuous first six months since he replaced Ian Narev.
CBA has faced a string of scandals in the past few years – not all of them related to financial advice – but this demerger will turn down the volume on the worst of them.
