Citi says SMSFs, low returns may push major banks to sell-off wealth arms
Lacklustre earnings growth, low returns on equity and the explosion of self-managed superannuation schemes could prompt the major banks to sell all or parts of their wealth businesses, global bank Citi predicts.
Citi analyst Craig Williams noted that the banks’ wealth arms, largely acquired in the early 2000s, had not become “the fast growing, low capital intensive earnings stream” the lenders had expected.
Bank customers, Mr Williams concluded, had opted for more flexible or cheaper wealth solutions, such as do-it-yourself super rather than bank savings vehicles. ANZ Banking Group and National Australia Bank were the most likely to explore options for their wealth arms, such as seeking joint venture partners, Citi predicted.
In the early part of this century, the banks had high expectations for their newly acquired life insurance and investment platform businesses. Investment and protection products could be cross-sold to existing bank customers in a mandated super environment where the capital requirements were low.
But, said Citi, with the exception of Westpac Banking Corp, “all of the other major banks have experienced significantly slower earnings growth in their wealth management divisions compared to their traditional banking businesses.”
Furthermore, the banks are now facing further regulatory capital requirements to support their homeloan books and could decide to raise additional funds by selling assets.
The dip in fortunes comes as Australia remains an attractive destination for offshore players. The local super sector, at $2 trillion, is the world’s fourth largest and is expected to grow to more than $7 trillion over the next 20 years, opportunities exist in the life insurance market thanks to the extent of underinsurance in Australia and the local dollar has fallen substantially.
Citi suggests that each of the banks could look at disposing major and minor parts of their wealth businesses.
ANZ, which has already sold two wealth units in the past two years, might consider selling its e*Trade online share broking division and Commonwealth Bank of Australia, which in recent years has been extracting itself from the management of listed property funds, could consider divesting its asset management, life insurance or accounting divisions.
“If CBA management does decide to undertake more substantial wealth management divestments, a sale of GAM [global asset management] is most likely in Citi’s view,” said Mr Williams, predicting that the division was worth about $4.2 billion.
Other options open to the banks for their wealth arms are joint venture arrangements, following a trend that has started offshore.
NAB and ANZ would be most likely to pursue deals of this kind, says Citi. In the case of NAB, the bank could sell a 51 per cent stake in the wealth division for $3.4 billion, with a 25-year distribution agreement and the ability for the purchaser to acquire the remainder of the stake over an extended period. Equally, says Citi, “this arrangement could be what is envisaged with just the life insurance business.”
NAB has already been looking at options for its wealth division. In May this year, it struck a deal with a reinsurer to take on 21 per cent of its troubled retail life insurance book, an arrangement expected to release $500 million of capital back to the bank. There has also been speculation that offshore insurers have been looking at the Melbourne-based lender’s life arm.