Major banks have been paying premiums for wealth management businesses over the past decade, but the hefty price tags have not paid off, analysts at Nomura Australia have said.
The analysts, led by Victor German, said wealth managers’ ungeared return on equity fell short of the returns posted by major banking groups, suggesting the premium valuations paid for the businesses were unjustifiable.
“Although our analysis doesn’t fully capture the strategic rationale of the transactions, we estimate that targets delivered a [compound annual growth rate] earnings growth of just 1 to 8 per cent per annum,” they said.
They said wealth management earnings were at a low point in the business cycle and made up about 10 per cent of banking group profits. However, even if wealth management divisions contributed 14 per cent of group earnings, they were unlikely to drive group performance.
However, several bright spots remained.
The analysts said weak net flows into retail managed funds would reverse when financial markets improved.
“We believe the outlook for this segment remains positive over the longer term when market conditions normalise and investors begin to see stability and positive returns,” they said.
“As such, we expect to see a rebound in equity-linked earnings when market conditions improve, with [Commonwealth Bank of Australia] and [Westpac] likely to be greater beneficiaries than peers.”
Westpac Group highlighted its retail and wealth divisions as key drivers of cash earnings after a jump of 7 per cent to $6.3 billion for fiscal 2011, the group said.
Westpac retail and business banking reported an 11 per cent increase, St George increased by 12 per cent and Westpac New Zealand was up 41 per cent, boosting BT Financial Group’s (BTFG) cash earnings by 9 per cent through cross-selling.
“BTFG had a strong year, increasing cash earnings 9 per cent with improved funds management earnings and a stronger insurance result,” Westpac said.
Nomura analysts said the outlook for superannuation was also positive.
“Underpinned by compulsory superannuation contributions, the growth outlook for super remains attractive,” they said, adding the super system would see net inflows for the next 20 to 30 years.
