Banks want to be there, till death do us part
Australia's banks have found another pie to sink their teeth into, write Eric Johnston and Michael Evans.
Australia's banks have found another pie to sink their teeth into, write Eric Johnston and Michael Evans. It was a small graph buried in the middle of a long and otherwise uneventful PowerPoint presentation.But the illustration, detailing the expected growth in Australia's superannuation assets over the next two decades, is significant for Australia's big four banks. It is where they see their next leg of growth to keep their run of record profits in check.A slowly rising table, (detailed at right), resembles the path of an aircraft on the runway, slowly gathering speed and height before suddenly rising at a fierce pitch.The table represents the expected growth in Australia's wealth management and superannuation assets - from barely a blip in 1996, to about $1 trillion today to in excess of $6 trillion by 2030.In today's terms a figure this size would place Australia's super assets somewhere between the entire economic output of China, the world's second biggest economy and Japan, the third largest.When Brad Cooper, the boss of Westpac's wealth management arm BT Financial Group candidly referred to the big banks performing a "land grab" in the wealth management industry he didn't mince words about its significance."What mortgage share been to banks over past 20 years we think the growth in wealth will be to banks over the next 20," Cooper said.Just as Australia's property boom generated unprecedented wealth for property owners over the past two decades, it did so too for the banks. But with a generation of younger workers and families unable to see the chance of capital gains on their primary residence that their parents did, many already feel priced out of the market.And combined with the outlook for low credit growth, Australia's banks face a challenge in delivering their run of record profit growth.The big banks need a new trick to keep the growth coming.Cooper detailed to the bank's biggest investors how banks do a poor job in handling the transition of customers from borrowers to investors as they have paid down their mortgage and become high-net-wealth individuals. Now, faced with a lack of new mortgage customers, they are looking at holding on to the wealthy ones they've got, laying the groundwork for holding your business as you make the transition from borrower to lender, til death you do part.For banks, wealth management has long been the holy grail for a source of potential earnings power. Now they are under more pressure than ever to make it work.Australia's big four lenders made serious inroads into wealth management early last decade, spending up billions on businesses for what top bank executives described at the time as "the best house in the street".Commonwealth Bank made the first serious move in early 2000 with its $9 billion play on the Peter Smedley-managed Colonial Group. This kicked off a flurry of transactions. Just a month later National Australia Bank bought Lend Lease's MLC businesses for more than $4.5 billion. Elsewhere, Westpac collectively paid more than $1.2 billion for BT and Rothschild & Son's Australian funds management business in separate transactions. ANZ, meanwhile entered into a complicated joint-venture arrangement with ING Asset Management.However investors soon found the banks clearly overpaid as they bought these assets at the top of the market. Ever since the return on their investment has barely covered the cost of the capital for the deals and in many cases, they've been destroying value.Meanwhile banks found it difficulty to integrate the newly acquired businesses, with cultural differences persisting between managing wealth advisers and traditional banking. Banks also found the much-promised cross-selling of wealth management products from bank branches difficult."Wealth management acquisitions have fallen short of generating the expected level of returns," says Victor German, an analyst with the investment bank Nomura.In 2009 ANZ moved to full ownership of the ING Australia wealth management business in a $1.8 billion deal and renamed the business OnePath.But with lending margins under more pressure than ever banks are persevering with their wealth management plays. Combined with key changes in the way Australia's superannuation system operates, banks have renewed hope on wealth.The key is the staggered increase in the compulsory superannuation contribution employers have to pay from the current level of 9 per cent to 12 per cent starting next year. Add this to an ageing population with increasing need for financial advice over mortgages and suddenly the motivation becomes clearer.The increase in superannuation payments alone is expected to see the total wealth management profit pool grow 43 per cent to nearly $10 billion by 2017.The changes will mean the average retirement lump sum for men is about $245,000 for men and $170,000 for women, according to Treasury figures. By 2036 these are expected to lift to $485,000 for men and $345,000 for women.Unlike traditional banking, the superannuation industry is still highly fragmented. The banks are largely playing in the retail superannuation space which represents less than a third of the total market. The biggest single component by asset size remains the self-managed superannuation funds at over a third industry and public sector funds make up the balance.However, several factors are starting to swing behind the big banks. Increased and costly regulatory oversight and technology are driving industry change. This is helping the banks take market share from their rivals. At the same time banks have been able to focus on driving more profitable growth."I wouldn't like to be a wealth management business that's not owned by a bank today and I don't think I'd like to be a bank that doesn't own a wealth management business," said NAB's head of MLC and wealth management, Steve Tucker.The idea of a bank and wealth manager sitting together is a logical combination of businesses, he says."If you really just break it down to what customers need: They've all got superannuation, they've all got bank accounts, they need insurance, they all need credit cards, there is a real need for advice in the Australian community in a complex world," he says.Tucker points out this had always been the original business case when NAB acquired MLC. It continued to be the case when NAB made a $13 billion bid for AXA Asia Pacific, a move that was ultimately blocked by the competition regulator."The idea was clients were ultimately going to want to get most of their financial services met in an integrated fashion - both banking and wealth needs. We've been making a lot of progress over the past 12 years to get to the point where we are doing that for a lot more customers than we ever have before," he says."There's still challenges, but there the opportunity is as significant - if not more significant as it has ever been".BT's Cooper for one acknowledged his bank hadn't been good at holding customers as they went from being borrowers to high-net-wealth investors.He said changes to superannuation regulations would see managing low-cost super become unattractive for providers and that continuing advice to small investors was "not going to be worthwhile except for high-net-wealth individuals".Bank investors though, remain sceptical. Few see the businesses as supercharging earnings for the medium term at least."While structurally we believe the outlook for wealth management is sound and attractive for banks, the businesses are not sizeable enough to make a material difference to bank earnings growth over the medium term," said Nomura's Victor German.For all of the big four banks, wealth makes up less than 10 per cent of annual earnings. Westpac has said it hopes to take this to as much as 15 per cent over time.Even as growth comes at the business level it would be hard to make a significant impact on group earnings.But for the banks there is a broader strategic motivation for their wealth management play. Funding is becoming scarce and running a wealth business is relatively "capital light" - that is banks don't have to set aside as much high cost capital on their balance sheets to back the business."That pool of superannuation money is going to be a growing source of funding for the banks in terms of both getting deposits and retirement savings in a way that can be used to help fund the growth of the economy," says NAB's Tucker.He points out the pool of savings can help the development of the corporate bond market in Australia."Not withstanding the last couple of years have been pretty challenging the superannuation system is growing, and it's growing quickly," he says.Even with the banks jostling for market share, AMP remains the market giant in terms of retail funds under management, life insurance and advice.Following last year's acquisition of the Australian arm of AXA Asia Pacific, the merged company has nearly $93 billion of retail funds under management. This eclipses NAB's $79 billion and Commonwealth Bank's $71.4 billion.While AMP runs a modest banking business, Craig Meller, the managing director of AMP's flagship financial services, believes there is no compelling reason for the banks to be involved in super."You look at the history of AMP, and indeed the history of AXA pre-merger, both businesses were growing strongly in the wealth management market place keeping abreast with the overall growth rates of the banks," he said."Frankly, since the merger of the two businesses, nothing has changed in that respect.""Others are choosing to invest in that marketplace. We think to be successful in it, you need to be a big player, and we're the biggest player. so we welcome the competition and we're not surprised by it," he said.In the contested retail funds management industry, the five major wealth players, including AMP, account for about 60 per cent of the life insurance industry and about 75 per cent of the retail funds management industry. While further consolidation is expected, the big-ticket acquisitions are considered to be largely off the agenda after the competition regulator blocked NAB's attempted AXA Asia Pacific play.Meller points out that a branch network is not needed for wealth given most of his new customers come to AMP through its dominant corporate super business."Someone who has their corporate super with AMP, if they need any more help or advice, they are more likely to come to AMP as they are to the people who sell them their credit card," he says.While AMP increasingly sells mortgages through its financial planning network, the core of its business is about wealth management, Meller says."It's about providing financial advice and it is about providing financial advice on the three major needs that people have in their life from a financial perspective. This is owning a home, life insurance and retirement."If you look at our business, at its core it is helping people achieve those three core objectives through helping them provide quality financial advice and then building product solutions."Our dominance in these markets, puts us in a stronger position than anyone in the marketplace to grow along with the rest of the wealth management industry," he says.While cashed-up banks are always examining acquisitions to grow their share, the Australian Competition and Consumer Commissioner's decision to block NAB's move on AXA Asia Pacific sent a strong message that it would not tolerate the big banks using buyouts to gain significant share.This has forced the banks to become more strategic and look at mid-tier buyouts.Last year, Commonwealth Bank paid $373 million for Count Financial, a planning and accounting business that specialised in supporting self-managed super funds.Westpac's Cooper said acquisitions were on BT's agenda, highlighting how 11 large companies controlled 75 per cent of the market."We think there will be many players looking at their models and looking at their tenure in the industry and we will keep a watching brief on where those opportunities might pad out our scale and capability as well."However for NAB's Tucker, who has felt the tangle of competition rules, he said it would be "hard to see" the large banks undertaking major acquisitions.