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CBA weighing ways out of CFS

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CBA has revealed that it is in the process of considering its options to exit Colonial First State, while its shares have risen to close to its five-year peak, following the bank’s half-year performance beating market expectations.

While CBA has signalled the closure of its aligned advice groups Financial Wisdom and CFP-Pathways in the second half and its divestments for a number of its insurance businesses are underway, it is yet to confirm the details of its exit from the remaining wealth businesses. 

The bank managed to sell off Colonial First State Global Asset Management (now First Sentier) in August and sold advice business Count Financial in October. 

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Colonial First State (CFS) remains for now, along with Aussie Home Loans and CBA’s minority shareholdings in Mortgage Choice and advice and accounting group Countplus, but the bank has indicated its intention to cast them all off. It has also planned to divest its general insurance unit.

The superannuation business may also be set to only cost the bank more, with three ongoing class actions having been launched against CFS.

Chief executive Matt Comyn commented: “With businesses such as CFS, we’re actively exploring alternatives to potentially exit there.

“In businesses such as Aussie and general insurance, general insurance is still under strategic review. I’d say for both of those businesses, there’s been some degree of regulatory uncertainty, which is not unexpected in the wake of the royal commission. To the extent that it would be appropriate to exit either of those businesses, we’d do so on the basis that all of the relevant changes and regulation was in place.

“There’s a very rapid agenda for implementation from the government this year. We anticipate implementing all of the changes in the first half of this calendar year as well.”

He added the bank will update their status at the full year, subject to regulatory changes. 

The bank has also dropped a number of its overseas arms – online South African bank TymeDigital was sold in November 2018 and the NZ life insurance business was exited earlier that year, in July. Next to be reviewed is its Vietnam International Bank.

The business simplification measures are said to have saved CBA $222 million.

Profit down 4.3%, income flat

The bank generated a cash net profit after tax (NPAT) of $4.4 billion for the six months leading up to December, slipping by 4.3 per cent from the previous year’s first half result of $4.6 billion. 

Operating income for CBA remained flat year-on-year at $12.4 billion. Net interest income slightly increased by 1.7 per cent, mostly from transactions. 

The bushfire crisis alongside the December Queensland hailstorm have caused its insurance income to plummet by more than half, falling by 54.4 per cent to $31 million. In particular, there were $83 million in fire-related claims.

Funds management income at $489 million had also dropped by 14.2 per cent, with the bank citing repricing in Colonial First State bringing on a decrease in its income of 4 per cent to its income of $422 million.

The Commonwealth Financial Planning division had seen drastic decrease in funds management income of 72 per cent, down to $20 million, caused by cut ongoing service fees and grandfathered trail commissions, as well as there being lower volumes of initial advice.

Other challenges for the bank were said to include low credit growth and a low interest environment. 

Nevertheless, the bank’s share price on Wednesday afternoon was $87.75, a fair way above where it had sat a year prior at $73.33.

Mr Comyn noted the retail banking business had performed well, with “strong” growth in home lending and deposits.

Daniel Yu, vice president and senior analyst at Moody's Investors Service added: "Asset quality also remained strong, reflected by an improvement in housing arrears.

"The bank’s very strong capital remains a key support to its credit profile. And including the benefit of a number of divestments, the bank reported a pro forma Common Equity Tier 1 ratio of 12.2 per cent, providing a strong buffer above APRA’s unquestionably strong capital requirements.”

Earnings per share for the first half were $2.53, down by 12 cents, with the dividend per share remaining flat at $2.

Wealth NPAT down 8 per cent

The wealth management segment contributed 2.8 per cent to the group’s NPAT for the half, with its profit of $127 million. The division’s NPAT was 8 per cent down on the year before and operating performance declined by 10.6 per cent. 

Still, its NPAT for the interim had immensely improved on the prior half’s result of $26 million, jumping up by almost five times.

Revenue for the division was down by 4.3 per cent to $422 million.

Average funds under advice was $173 billion, up by 7.9 per cent, but it was offset by platform-pricing changes. Assets under management were $16.7 billion, up by 20 per cent.

Meanwhile, the institutional banking and markets segment produced $476 million, a 21 per cent increase, and the retail bank rose by 6 per cent to $2.1 billion, still the bank’s largest driver of profit with 48 per cent of its NPAT.

The bank’s operating expenses were up by 2.6 per cent, having been hit by wage inflation and elevated risk and compliance costs. 

Wealth dominates remediation

Customer remediation to date has cost CBA $2.2 billion, with $630 million in refunds being made, $596 million in refunds remaining and $978 million in program costs. 

The vast majority of customer refunds have been from CBA’s wealth segment – with $374 million in refunds being due to aligned advice and $477 million coming from its other wealth arms, including fees for no service provided in the Commonwealth Financial Planning business and CommInsure Life Insurance. A remaining $375 million in refunds was attributed to the banking segment.

The bank said assessment of the aligned advice remediation is ongoing.

It kicked up the number of staff dedicated to remediation, adding 336 full-time employees compared with the year before. There also are almost 500 more risk and compliance staff. 

Looking forward, the bank is focusing in on investing in its core businesses. 

“Uncertainties remain about the global economic outlook, and we are mindful of the drought and bushfires,” Mr Comyn commented. 

“We have both the capacity and the appetite to lend more to support our customers and the economy.”

But he remains hopeful for the long-term prospects of the Australian economy.

“Our population continues to grow, we have a strong trade and fiscal position, and a solid pipeline of infrastructure investment provides ongoing stimulus,” Mr Comyn said.

“Recent improvements in key indicators also demonstrate the economy’s resilience, including growth in employment and the rebound in housing.”

 

CBA weighing ways out of CFS
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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