Australia: CBA switchback shows weakness of Royal Commission

News and opinion on finance

Euromoney said earlier in March that the Royal Commission into banking behaviour in Australia was all shouting, little substance. And here’s the thing about banks: they can tell the difference and exploit it accordingly.

On Thursday, CBA provided a “wealth management and mortgage broking businesses update”. The update was that the planned demerger and sale of those operations has been suspended.

And one can assume it has been suspended because the Royal Commission, to widespread surprise, has let banks off the hook.

The single-biggest change that was expected to come out of the Royal Commission was a requirement to separate banks from wealth management arms to avoid the conflicts that have been revealed as being rife in the industry.

The vertical integration model, it was assumed, was over: no longer would banker, fund manager and financial adviser all pitch the same client from the same single organization.

This was so widely expected that every bank bar Westpac has already set about selling those businesses.

Sure, they did so partly because it appears the temper of the time is to be a simplified, basic bank without the reputational and compliance uncertainties that come with a wealth business. But without exception, every bank thought there was a strong chance they would be forced to sell anyway.

Not so. The Royal Commission contained no such requirement, partly, it appears, because Commissioner Kenneth Hayne observed that the separation was already happening. Well, now it might not be.

The softness of Royal Commission recommendations has afforded [the banks] a strategic opportunity they weren’t meant to have: leaving things pretty much as they were 

CBA had been shifting assets well before the Royal Commission, selling its problematic insurance arm, CommInsure, to AIA for A$3.8 billion in September 2017. It then sold the international arm of its fund management business, Colonial First State Global Asset Management, to MUFG for A$4.1 billion in October 2018.

By then, in June 2018, it had announced a plan to “demerge” the wealth management and mortgage broking business. The idea was to create a new business, for the moment called NewCo, to contain the domestic Colonial First State fund management and superannuation business, and a range of other wealth and broking businesses.

The plan appeared well advanced: NewCo’s management had been announced, with SocietyOne chief executive Jason Yetton to head it, and Andrew Morgan, the CFO of CBA’s wealth division, to hold the same title in the new company.

The plan was that once the businesses were demerged, the NewCo would be sold outright or floated on the stock exchange.

Today, though, that’s all on hold. CBA says it is instead prioritizing implementing the actual recommendations of the Royal Commission, refunding customers and remediating past issues.

CBA says it has spent or provisioned A$1.46 billion in recent years to deal with these issues, and has “suspended preparations for the demerger in order to support the focus on these priorities”.

Perhaps that’s true and this is simply a delay, but CBA would now be entirely and unexpectedly within its rights to hang on to its wealth business – which, as CBA said on Thursday, accounts for A$1.215 billion of those costs. Having expensively fixed the business’s issues, will they keep it after all?

Not alone

And they might not be alone.

National Australia Bank (NAB) – which, like CBA, got rid of its life insurance business quickly, selling it to Nippon Life for A$2.4 billion in 2016 – had announced plans to exit its wealth division, MLC, either through trade sale or market exit.

But following the demise of its CEO Andrew Thorburn and chairman Ken Henry in the aftermath of the Royal Commission, NAB’s most recent market guidance said the sale of MLC would be pushed back and would probably happen in the 2020 financial year.

And ANZ’s announced sale of its OnePath Pensions and Investments business to IOOF might not happen either, though for different reasons.

That was signed, sealed and awaiting regulatory approval, only to be potentially stymied when the Australian Prudential Regulation Authority disqualified three IOOF executives and two of its directors, and sought to impose licence restrictions on the business. ANZ now says it will review the deal.

That said, Shayne Elliott, ANZ CEO, was probably the first and most unequivocal to talk about the need to simplify and shrink the whole bank; it is probably not ideal for ANZ if that deal falls through – a separate sale of its life insurance business to Zurich should still go ahead.

No doubt all bank executives are looking at Westpac, which has said it is committed to keep its own BT wealth business, and thinking: well, if we don’t have to sell, are we better off looking like them?

It’s not an option they expected to be open to them, but the softness of Royal Commission recommendations has afforded them a strategic opportunity they weren’t meant to have: leaving things pretty much as they were.

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