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CBA demerger a positive step, says Morningstar

Glenn Freeman  |  26 Jun 2018Text size  Decrease  Increase  |  
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The Commonwealth Bank's demerger of its wealth management and mortgage-broking businesses should be a positive for the embattled lender and allow it to focus on its core business, says Morningstar senior analyst David Ellis.

Ellis believes the new CBA will be "a simpler and slightly smaller business" after the demerger. While this is still subject to final board, shareholder and regulatory approval, no difficulties are anticipated.

"If successful, the demerger will enable refreshed Commonwealth Bank senior management to focus on the more profitable core banking businesses in Australia and New Zealand," says Ellis, adding that it is too early to gauge how it could affect group earnings, returns on equity, capital, dividends and our $83 fair value estimate.

CBA chief executive, Matt Comyn, on Monday indicated the creation of a separate business – owned by CBA shareholders rather than the bank itself – was driven at least in part by a desire to cut exposure to areas that drew criticism during the royal commission.

CBA banks lenders Comyn big four article

The new CBA will be 'a simpler and slightly smaller business', says Morningstar's David Ellis

The bank has cancelled the initial public offering of its fund manager, Colonial First State Global Asset Management, and will instead bundle it with Colonial First State and its aligned financial planning licensees – Count Financial and Financial Wisdom – as CFS Group, for demerger and a separate ASX listing. Its mortgage broker, Aussie Home Loans, will also be included in the spin-off.

Commonwealth Financial Planning will be retained. This unit comprises salaried financial advisers employed by the bank, versus its other advice divisions' commission- and asset-based remuneration systems.

News of the CBA restructure comes after National Australia Bank (ASX: NAB) sold off its UK operation, Clydesdale Bank and announced the sale of its wealth manager, MLC.
It also follows ANZ Banking Group's (ASX: ANZ) three-year-long process of removing unprofitable businesses to boost the core efficiencies.

Ellis notes the proposed restructure is a "demerger, not an IPO". Existing CBA shareholders will receive shares in CFS Group proportional to their existing CBA shareholdings.

The demerged entity will be a standalone, independent ASX-listed wealth management company with a potential market capitalisation of about $7.5 billion.

"Commonwealth Bank does not intend to retain any shareholding in CFS Group following the demerger. The demerged business is expected to have a strong capacity to pay franked dividends," Ellis says.

He alludes to recent examples "of unwanted 'ugly duckling' businesses demerged and subsequently rewarding shareholders handsomely".

"It is obviously too early to reach conclusions concerning the likely outlook for CFS Group, but the business will be in control of its own destiny and growth strategies – we see this as a key positive.

"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," Ellis says.

CBA shares are currently trading at $73.25, a 12 per cent discount to Morningstar's FVE of $83.

 

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Glenn Freeman is senior editor at Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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