What are wealth businesses worth?

By

01/11/2018

The investment analyst community has thrown into doubt valuations of listed wealth management businesses in the wake of the Hayne royal commission and the recent stumble by wealth giant AMP.

Negative views from both buy-side and sell-side analysts came thick and fast following the announcement AMP would offload its life insurance business and planned an initial public offering of its New Zealand wealth business on Thursday last week.

AMP shares dropped more than 23 per cent on the day of the announcement, prompting the company to hold a follow-up call on Tuesday to explain its plans to shareholders. The shares recovered some from their lowest-ever trading levels today.

At a time when banks, including Commonwealth Bank and National Australia Bank are planning their own spin-offs of wealth management businesses, these companies are likely to face a skeptical reception from investors and the investment analyst community.

Over night on Wednesday, Commonwealth Bank announced it had sold Colonial First State Global Asset Management (CFSGAM) to Japanese bank Mitsubishi UFJ Trust for $4.1 billion, abandoning plans to spin off the business with its wealth and mortgage broking arms. As part of the announcement CBA said it had changed tack on the planned spinoff believed a sale of the business was in the best interests of customers, shareholders, and staff.

The concern from the local investment community around the risks associated with wealth management businesses remains ever present.

“The very damaging royal commission has been an unprecedented disaster,” Morningstar equity analyst Chanaka Gunasekera noted, following AMP’s announcement last Thursday.

“The prize in the [AMP] portfolio is the greater wealth exposure,” Morgan Stanley’s Daniel Toohey, wrote. “However, the royal commission [and regulatory uncertainty regarding] vertical integration and grandfathered commissions is an overhang.”

In June, CBA announced that the demerger of its wealth management business would include its asset management business, Colonial First State Global Asset Management (CFSGAM), along with its advice dealer group brands, Count Financial and Financial Wisdom.

CBA’s demerger plan is yet to receive board and shareholder approval but could be completed next year, the bank has outlined.

Meanwhile, NAB has flagged its plans to spin-off its asset management and wealth business, which would probably include MLC Financial Planning, Godfrey Pembroke, Apogee, Garvan and Meritum dealer group brands. The bank has appointed former Perpetual chief executive Geoff Lloyd to run the business.

The “overhang” on public market valuations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is increasingly an issue, particularly following what’s analysts are widely referring to as a “fire sale” by AMP to free up capital for costs relating to more potential fines, higher compensation payments and possible class actions,

“Material reputational damage, a more proactive ASIC, a stronger compliance framework, and compression of margins due to the royal commission will mean lower growth rates for funds under management and advice,” Morningstar’s Gunasekera says of AMP. He also points out that AMP’s wealth management earnings could be at further risk should the royal commission’s final report recommend vertical integration be dismantled.

Neither CBA nor NAB has elaborated on their demerger plans since their announcements. Investment Magazine’s sister publication Professional Planner contacted both banks at press time.

 

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