PORTFOLIO POINT: There are strong incentives for the major banks to ramp up their wealth management activity, meaning acquisitions of smaller players are highly likely.
The rationale for the major banks to expand their presence in the country’s wealth management sector has never been greater.
Credit growth is at a snail’s pace, resulting in subdued organic profit growth, and potential wealth management acquisitions are trading at single-digit multiples, despite the federal government’s commitment to increase the superannuation guarantee to 12%.
At some point, household deposits – which have swollen to $535 billion in the wake of the GFC – are going to take fright at inflationary pressures and run straight into the welcoming arms of the wealth management sector.
There is zero chance of a major bank being allowed to take over another deposit-taking institution, but a new regime at the Australian Competition and Consumer Commission is going to have a tough time finding reasons to block banks expanding their wealth management footprint, after their much-criticised handling of NAB’s attempt to buy AXA Asia Pacific.
Despite the near-term gloom, Australia’s financial services market is expected to more than double in size over the decade.
Ironically, the big banks have little to fear from the impending introduction of the Future of Financial Advice (FOFA) reforms, given CBA’s involvement in the Storm Financial disaster. Thanks to the big banks’ integrated business models, the banning of commissions paid by product manufacturers means nothing. The introduction of scaled advice also plays right into the hands of the big banks.
But the uncertainty has cruelled investor confidence at the smaller end of town, while we await details on the extent of grandfathering arrangements and whether the implementation date for reforms is June this year or next.
Diversified financial services companies have underperformed the broader market over the past year.
Commonwealth Bank and National Australia Bank have so far shown the greatest willingness to expand through acquisition in the wealth management space.
Over the years, NAB has made multiple unsuccessful attempts to buy AMP. It turned its attention to an AMP target, AXA Asia Pacific, in December 2009 and failed there too.
CBA has been more successful in building on its Colonial acquisition, which it made in 2000. Most recently, it bought Count Financial, taking the number of its advisors to 1800 (second behind AMP). But it still has room to move: according to Plan for Life, CBA has 14% of the country’s retail funds under management, behind AMP with 18.6% and NAB with 15.8%.
In the first half, wealth management activities represented less than 8% of CBA’s group profit, compared with 17% in 2007.
CBA’s wealth management operations generated $272 million of cash profit in the December half, a 24% decrease on the same period a year earlier.
CBA’s interim results revealed a 4% drop in funds under advice, due to weak markets and adverse experience in disability classes of life insurance.
New CBA managing director Ian Narev is said to be a fan of buying distribution assets, evidenced by his key role in the tie-up with John Symond’s Aussie Home Loans and purchase of BankWest in 2008.
There is a theory that the banks are going to work harder to distribute internally-manufactured products through their own branch networks – i.e. will become more inward-looking for growth. Have you noticed ANZ’s heavy promotion of ANZ-branded life insurance of late?
But history shows the banks have a lousy record of organic expansion in wealth management.
There are too many stories of giant IT-project cost blowouts to give you anything other than confidence that the big banks are going to continue to have to buy capability.
It typically takes a team of close-knit entrepreneurs to build an innovative new product or path to market, and typically you don’t find too many entrepreneurs working within the confines of a bank.
Fortunately for the big banks, there are plenty of wealth management businesses of varying quality that they can buy.
Platform operator IOOF, fund manager Perpetual, accounting network operator WHK, and financial planning groups SFG and Plan B immediately come to mind.
|Table 1: Australian banks and wealth managers|
|-Company||Code||Price 13/03 ($)||Price 03/01 ($)||Market cap ($)||P/E||Dividend ($)||Dividend yield (%)|
|Commonwealth Bank||CBA||48.35||49.61||76.4 billion||11.25||3.25||6.73|
|National Australia Bank||NAB||23.74||23.76||53.1 billion||10.16||1.72||7.25|
|WHK Group||WHG||0.86||0.81||288 million||21.5||0.07||8.14|
|SFG Australia||SFW||0.34||0.32||233 million||6.41||0.02||6.25|
|Plan B Group||PLB||0.53||0.48 (11/01)||43 million||9.83||0.04||7.55|
Stewart Oldfield is a research analyst at InvestorFirst Securities.