SYDNEY (Reuters) - Commonwealth Bank of Australia CBA.AX said it would hive off its wealth management and mortgage broking businesses, and explore whether to divest its general insurance arm, as it narrows its focus down to traditional lending.
Australia’s biggest bank also unveiled a revamped executive team, seeking to rebuild its reputation after several scandals revealed flaws in its leadership culture, exposing it to closer regulatory scrutiny and potential fines.
CBA’s shares fell as much as 2.7 percent after the announcements - which according to analysts preempt structural reforms likely to be brought in by a powerful banking inquiry that has rocked Australia’s scandal-plagued financial sector.
“Today’s announcement ... responds to continuing shifts in the external environment and community expectations, and addresses the concerns regarding banks owning wealth management businesses,” Chief Executive Matt Comyn said in a statement to Sydney’s stock exchange on Monday.
The bank said it would demerge the entire wealth management and mortgage broking arms into a separately listed new company called CFS Group, inclusive of its Colonial First State Global Asset Management (CFSGAM) business. The previously announced IPO of CFSGAM will no longer proceed.
“What we are really seeing here is the whole breaking down of their very expensively put together vertical integration business model,” said Hugh Dive, chief investment officer at Atlas Funds Management, which owns CBA shares.
CBA and the three other big Australian banks have spent years building large networks of financial advisers to recommend their products, but the powerful misconduct inquiry, or the so-called Royal Commission, could force the separation of the development and sales of financial products.
“We don’t know what the recommendations are going to be yet, but by doing this they are trying to get ahead of whatever those outcomes of the Royal Commission are,” said Dive.
The wealth management and mortgage broking arms account for about 5 percent of CBA’s total net profit after tax.
The combined CFS Group is expected to have a market value of A$6.5-A$10 billion ($4.82-$7.42 billion), Macquarie said.
According to a senior banking analyst at Shaw & Partners, Brett Le Mesurier, the spinoffs “had to be done” but the market might be responding negatively to the “extra level of overheads” the bank may have from a separately listed entity.
CBA shares have been hammered in recent months and hit a near five-year low in June amid damaging revelations at the Royal Commission that it wrongfully withdrew “advice fees” from dead people’s accounts and mistakenly double charged interest to thousands of business customers.
The inquiry, due to continue until early next year, is expected to start flagging legislative recommendations in a preliminary report to the government in September.
But Australia's top lenders have already started realigning their business away from the scandal-hit financial advice units, such as National Australia Bank NAB.AX that last month said it was looking to exit part of its wealth management arm by 2019.
CBA said it would not keep a stake in the CFS Group after the demerger in 2019.
The bank, which in a separate statement announced six executive appointments, said it was still seeking a replacement for Rob Jesudason who resigned unexpectedly as chief financial officer in May. CBA said it expects to make a permanent appointment after its full-year results in August.
CBA shares ended down 2.3 percent, in a broader market .AXJO that closed about 0.2 percent lower.
Reporting by Paulina Duran in Sydney and Rushil Dutta in Bengaluru; Editing by Joseph Radford and Himani Sarkar
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