CBA’s spin-off wealth management and mortgage broking businesses, CFS Group, will likely bode well for both the major bank as well as for shareholders, says Morningstar.
The major bank “surprised” on Monday with its announcement that it would split with its wealth and mortgage broking divisions, the research house’s analysts noted in a report.
But overall, this would be both a good outcome for CBA as well as the new entity CFS Group, it said.
“If successful, the demerger will enable refreshed Commonwealth Bank senior management to focus on the more profitable core banking businesses in Australia and New Zealand.
“Assuming the demerger completes as expected in calendar 2019, Commonwealth Bank will be a simpler and slightly smaller business,” the report said.
“We expect the demerger to reduce cash NPAT by about AUD 500 million per year, representing only 5 per cent of group profit.
“The demerger is likely to release more than 100 basis points of capital, paving the way for capital management initiatives in fiscal 2020.”
Morningstar noted that existing CBA shareholders would receive shares in CFS Group that were proportionate to the shares they currently own, with the new entity “expected to have a strong capacity to pay franked dividends”.
“We have seen plenty of examples of unwanted ‘ugly duckling’ businesses demerged and subsequently rewarding shareholders handsomely,” the report said.
“It is obviously too early to reach conclusions concerning the key outlook for CFS Group, but the business will be in control of its own destiny and growth strategies – we see this as a key positive.”
Demerged from CBA, the new business will be able to “operate as a specialist wealth manager”, free from the “bureaucracy and constraints” of forming part of a big banking group, according to the report.
Additionally, new chief executive Matt Comyn’s leadership reshuffle would “fast-track major restructuring, resolve significant roadblocks, and rebuild executive management ranks”.
While Morningstar was “initially surprised with insider Matt Comyn’s promotion” to the role, the research house’s view now is that “he is best placed to lead the large and complex business” and able to “provide certainty and continuity of business momentum.”
CBA shares dipped sharply after the announcement of the demerger, as reported by InvestorDaily yesterday.