InFocus: Have NAB and CBA left their wealth exits too late?

When the boards of both the Commonwealth Bank (CBA) and National Australia Bank (NAB) were scoping out their respective exits from wealth management they could not have contemplated that the fall-out from the Royal Commission would be followed by the impact of the COVID-19 pandemic.

By comparison, the boards of ANZ and Westpac must be congratulating themselves that they managed to exit wealth management with Westpac substantially unloading its financial planning business to Viridian Financial Group in March, last year, while ANZ exited via its transaction with IOOF.

The consequence is that while both ANZ and Westpac have had to deal with some residual remediation issues they have not been confronted by the same continuing balance sheet burden as CBA and NAB.

That much was made clear in April when NAB released its first-half results revealing earnings and revenue declines for MLC Wealth of 46.2%.

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The manner in which MLC Wealth is viewed on the NAB balance sheet is reflected in the fact that the business reported a decline in cash earnings of $43 million or 50.6% driven by lower net operating income and higher expenses.

The report to the Australian Securities Exchange (ASX) said net operating income was down 9.2% or $39 million while operating expenses were up 5.8% or $18 million with the bank citing “increased costs associated with the MLC Wealth separation and higher project spend on strategic and regulatory projects”.

CBA reported its half-year result to the ASX in February, well before the real onset of COVID-19 but the numbers pertaining to its wealth management division painted a most unflattering picture with the bottom line being that wealth cash net profit after tax had decreased 50% to $133 million.

What needs to be remembered about CBA is that its original strategy of floating of its wealth management businesses was substantially stymied by the fall-out from the Royal Commission and the priority was given to advice remediation costs. The result of this was that, in the meantime, it sold Count Financial to Countplus while closing down Financial Wisdom and Commonwealth Financial Planning Pathways – two projects which were still on foot last month.

Having already sold Colonial First State Global Asset Management to Mitsubishi UFJ Trust and Banking Corporation, the question for the CBA board now is how and when it will dispose of the remainder of the Colonial First State business.

It is a question very similar to that being considered by the board of NAB with respect to MLC Wealth.

While the original intention of both big banks appeared to be for a public float of their wealth divisions, the significant disruption caused by the COVID-19 pandemic and the consequent substantial capital raisings which have been forced on the banks raises questions about whether this is actually achievable any time inside two years.

This probably explains why, when itemising the banks immediate priorities to investors in its first half results, NAB referenced the separation of MLC Wealth under the heading “long term”.

Notwithstanding this, MLC Wealth chief executive, Geoff Lloyd, is still working assiduously towards a separation, and the underlying message contained in the bank’s first half results was that MLC Wealth was “progressing towards separation via a public markets exit while exploring alternatives”.

Understood to be amongst those “alternatives” is private equity or a foreign financial services player.

Either way, the size of the remediation bills for which both the NAB and CBA have made provision suggests that any new buyers will be seeking indemnities at least equal to those which CBA offered Countplus when it acquired Count Financial.