How the banks keep the sweetest morsels

When Westpac late last month announced that it was exiting its face-to-face financial advice business as part of a transaction with relatively little-known Melbourne-based firm, Viridian, one piece of financial information was critical to understanding its decision.

That information was contained at the very bottom of the bank’s announcement to the Australian Securities Exchange (ASX) and read as follows:

“Exiting the Advice business and moving the Group’s wealth businesses into the Consumer and Business divisions will result in:

• Removing the cash earnings loss from the Advice business ($53 million in FY18 excluding remediation costs); and
• $20 million (pre-tax) of productivity savings from operating one less business division.”

Broken down to its essence, this statement declared that Westpac was not only exiting a business heavily exposed to an increasingly costly regulatory burden, but that it was also drawing a line under acknowledged and potential losses.

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Just as importantly for Westpac, while the likes of National Australia Bank (NAB) and the Commonwealth Bank continued to scour the market for buyers of their wealth businesses, Viridian Advisory had emerged to enter into a transaction which would see it employ BT Financial Group’s salaried financial advisers and support staff.

Integral to the value of the transaction for Westpac was the reality that the bank was selling what it did not want and keeping what it valued most – its private wealth, platforms and investments and superannuation businesses.

In Viridian, it found a transaction partner of which a number of the shareholders were former Westpac or BT staffers, and a company with which it had maintained an ongoing commercial relationship.

This was something acknowledged at the time of the transaction by Viridian chief executive, Glenn Calder, who said it represented an extension of an existing partnership and that he believed that Westpac could see the potential in the Viridian business.

“We’ve got a shared background and understand the business we are buying,” he said.

The sheer pragmatism of the move was highlighted at the time of the announcement by Westpac chief executive, Brian Hartzer, who said the company was “realigning our capabilities into the lines of business where it makes sense based on customer needs”.

“Most customers don’t differentiate between banking and wealth products; they want help buying their home, paying their bills, planning for retirement, or protecting things that matter most to them. They expect professional service that meets their financial needs.”

“Moving Private Wealth into the Business division recognises that many of our high net worth customers have their own businesses or work for many of the companies we bank. Following our significant investment in Panorama and the launch of BT Open Services, we now have market leading platforms where the natural customer base is also primarily found in our Business division.

“Similarly, superannuation – including corporate superannuation, and support for SMSFs – is strongly linked to our Business division.”

Hartzer might have more bluntly stated: “In a post-Royal Commission world, Westpac is lowering its exposure to the comparatively high-risk world of planning and focusing on high net worth and leveraging its platform service capabilities”.

The Westpac CEO might also have noted that, not unlike ANZ’s wealth and insurance transactions with IOOF and Zurich, there were ongoing mutual referral benefits likely to maintain the flow of funds onto the bank’s platforms.

Those who have been watching the manner in which the Australia’s four major banks have been navigating their exit from financial planning will have detected a common approach – exiting conventional advice while retaining high net worth “private clients”

When NAB last year confirmed its intention of exiting its wealth management business, excluding JB Were and nabtrade, it was a move designed to achieve almost exactly the same objectives as Westpac, but without a buyer having been found.

Importantly, NAB also announced in early February that nine months’ down the track from its initial announcement, it would be delaying its exit from the MLC.

On the heels of announcing the exit of both its chief executive, Andrew Thorburn and chair, Ken Henry, the big banking group said that while the MLC wealth management business had achieved good momentum under new leadership it had been impacted by the fall-out from the Royal Commission.

“…the current regulatory and operating environment for wealth businesses remains challenging and a delay of the intended public markets exit of MLC to FY20 is now likely,” the bank announced to the ASX.

It said NAB retained the flexibility to consider trade sale options and would take a disciplined approach to the exit of MLC executing a transaction at the appropriate time. 

Barely three weeks later the Commonwealth Bank announced a similar delay to its exit of the Colonial First State, Count Financial and Financial Wisdom businesses, together with Aussie Home Loans.

It said that it had suspended its demerger strategy for the businesses the focus on continuing client remediation and the recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

That means that while both the Commonwealth Bank and NAB remain intent on exiting substantial elements of their wealth management businesses the likelihood of them doing so before 2021 appears remote, with much depending on the prevailing political and regulatory environment in Australia and the state of the markets.

The challenges now confronting the Commonwealth Bank and NAB have served to underscore the good timing of ANZ in exiting core elements of its wealth and insurance businesses nearly two years’ ahead of its competitors.

While the sale of ANZ’s OnePath Pensions and Investments business remains somewhat problematic in the aftermath of the Royal Commission and legal action initiated against IOOF by the Australian Prudential Regulation Authority (APRA), the sale of advice businesses has largely been bedded down and the sale of its life insurance business to Zurich is all but complete.

Even though ANZ and Westpac have exited substantial elements of their wealth businesses, they have not been able to exit the responsibilities they have to their customers, particularly around the question of advice remediation.

Indeed, NAB’s interim chief executive and chairman-elect, Phil Chronican spelled out the reality confronting all the major banks – that remediation inevitably cost a good deal more than what was owed to a client.

Giving evidence before the House of Representatives Standing Committee on Economics inquiry into the four major banks, Chronican said: “It’s costly to remediate the customer because you’ve got to give them back the money you took and the cost of remediation itself is quite material”.

“So we end up paying, in some cases, twice as much to put customers back to where they should have been as we would have if we had done it properly,” he said.

NAB’s group chief financial officer, Gary Lennon said the cold reality for NAB had been remediation costs of $800 million over the last five years, “40 per cent is just dead cost go back and do the work to remediate customers”.

“So, we are definitely worse off on that 40 per cent out of that $800 million number. And then the compensation to customers includes interest as well, because we put the customer whole, including how they could have reinvested that number,” he said. “From whatever front you look at it, we are reputationally significantly worse off and financially significantly worse off.”