A longer-term rethink of the merits behind the Commonwealth Bank’s demerger of its wealth management business could see it retained under the major bank, according to Morningstar.
In an analyst note, Morningstar said Commonwealth Bank management and the board may hold on to the wealth business after it does its “remediation clean-up”.
It said that wealth management and mortgage broking businesses, known currently as ‘NewCo’, makes a cash net profit after tax (NPAT) of around $280-300 million a year, and based on a 12-13 multiple is worth about $3.5 billion.
“The bank is spending considerable amounts on remediation and process improvement and, if successful, the group could get significant leverage from a future well-run profitable and efficient wealth management operation,” it said.
“The final report of the royal commission did not call for integrated wealth businesses to be forcibly broken up, providing a window of opportunity.”
Morningstar analyst David Ellis maintained a positive outlook on CBA, basing it on its robust balance sheet, dominant market positions, strong profitability, organic capital generation, sound loan book and high returns on equity.
He believes a bank funding crisis, a severe downturn in Australia or a housing collapse could force sharp falls in earnings and dividends.
“CBA has traded at a premium to major bank peers due to lower financial risk and a long history of sustainable earnings and dividend growth despite slow system credit growth and pressure on funding costs,” Mr Ellis said.
“Some market investors consider CBA’s strong emphasis on home loans a weakness, but we argue it is a key strength.
“In our view, concerns centered on a US-style housing crash in Australia are overdone.”
However, Morningstar said the fallout from the Hayne royal commission has led to a far tougher regulatory environment for advisers and the wealth management industry.
As a result, this could raise the cost of good quality financial advice to such an extent that it becomes cost-prohibitive for the “wider universe of investors”.
“Good quality financial advice may only be available for the very wealthy. This is not a good outcome for Australia’s rapidly growing cohort of retirees, irrespective of whether they are self-funded within or without the SMSF sector, or members of industry funds or retail funds,” Morningstar said.
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