Commonwealth Bank of Australia: Why is KKR buying Colonial First State?

The news that KKR will buy a majority stake in the Commonwealth Bank of Australia’s (CBA) wealth management business is striking from both sides of the fence.

On the Australian side, the seller, it shows that the banking industry’s commitment to get out of wealth management is intact, despite fears that the big four banks might renege on that idea.

Commissioner Kenneth Hayne had suggested that banks having wealth and advisory arms was a breeding ground for conflict of the kind his Royal Commission bluntly exposed. However, he never made an order that banks should divest them.

When CBA’s CEO Matt Comyn said in March 2019 that he was suspending a previously announced plan to shift Colonial First State, the wealth business, it appeared that the bank was just wriggling off the hook.

Now, encouragingly, we know better: Commonwealth has found a buyer, one that will pay A$1.7 billion at a time when capital is very handy indeed.

And perhaps it’s this latter point – the need for capital to deal with the damage wrought by Covid-19 – that will prompt a bit more urgency at Westpac and National Australia Bank (NAB) in selling their wealth management arms.

What’s really interesting, though, is the buyer.

This is the third CBA wealth or insurance-related sale in the space of a few years: the life insurance business went to AIA, and the international asset management business to MUFG. No surprise there, on either count: buyers in the same industry trying to expand into reliable markets.

Global private equity buying into Australian wealth, though? That’s interesting. And KKR wasn’t the only interested party: it is understood to have had to fight off interest from Blackstone. KKR is paying 15.5 times Colonial First State’s pro forma net profit after tax.

On first glance, it is a weird time to brave Australian wealth management, an industry whose reputation is in tatters and has been for some time.

The Royal Commission was merely the very public conclusion to about a decade of reputational hits covering everything from life insurance being sold to mentally impaired people, to trailing commissions being charged to customers who had been dead for a decade. The whole delivery system of wealth advice is in a mess.

Superannuation industry

Then again, that sort of contrarian position is what private equity does well, and KKR will no doubt have looked at another trend in making its decision: the relentless growth of the Australian superannuation industry, buoyed by the superannuation guarantee, which compels employers to contribute 9.5% of employees’ earnings to a complying retirement fund.

Because of this, Australia, with a population of just 25 million, has a retirement asset pool in superannuation funds of A$3 trillion as of December 31, one of the largest asset pools in the world.

KKR has said that it plans a significant investment programme, including a simplified product offering, improved service, investment in digital channels, modernized technology and better access to member education.

Commonwealth Bank would tell you it has been doing all these things for years anyway, but still, you can’t really argue with any of them.

The next interesting thing will be to see if Blackstone and others follow KKR’s lead. NAB’s MLC wealth business, and Westpac’s BT, are both in play. Watch this space.