It’s clear the Commonwealth Bank’s decision to suspend the sale process for its wealth management and mortgage broking businesses has been driven by the need to repair the division’s finances (and reputation) in the wake of the banking and finance royal commission.
In their current state the two businesses are unsaleable, or if a price can be struck with a trade buyer (an IPO is out of the question), it would be so low as to generate significant losses.
Even so the CBA surprised yesterday with the announcement of the halt to the sale process because it had been looking at getting $4 to $4.5 billion from a trade sale.
But it now seems clear the two businesses are in no fit state to be sold because of legacy issues like compensation and make good payments flowing from the royal commission recommendations.
While the CBA reiterated that it was still committed to “ultimately” exiting its wealth management and mortgage broking businesses, that is obviously quite a while off, years in fact.
Some commentators though reckon the bank is changing its mind about selling these businesses.
The CBA did not provide any timeframe for the proposed spin-off or separation, causing analysts to speculate that it could eventually retain both businesses.
“CBA is prioritising the implementation of these recommendations, refunding customers and remediating past issues,” the bank said in a statement. “Accordingly, CBA has suspended preparations for the demerger in order to support the focus on these priorities.”
Last week, the bank said there was still a lot of work to be done under its remedial plan to address the 76 recommendations made by a powerful inquiry into the financial sector, which had revealed widespread instances of misconduct.
Yesterday’s statement made it clear the CBA faces a lengthy process to repair the damage.
There are financial remediation programs for misconduct that occurred over years and which need a massive and continuing investment by the bank in its systems, processes, and people to oversee the remediation programs and the needed upgrading of its compliance and risk capabilities.
Trying to pass these costs and requirements onto a purchaser would have seen the mooted sale price slashed – in fact, you have to ask if the two businesses are unsaleable given the problems and the amounts spent so far by the bank, with more to be invested.
CBA provided a breakdown of the previously-announced $1.46 billion it has spent or provided for remediation. More than $1.2 billion of that total relates to the wealth management businesses that were to be at the core of the demerged operation
Upgrading computer systems and processes and going back through the accounts and other data is proving far more costly than the CBA originally estimated.
The cost so far is $650 million, which is more than the $610 million paid so far to affected customers, with an unknown (but large amount) to come.
In its original idea, the CBA planned to sell or spin off the two businesses with a $200 million indemnity for any further wealth management issues.
That is obviously now redundant given the escalating costs and rather than having the purchaser of the businesses suing the CBA to recover unforeseen costs (and the bad publicity that would go with that), the bank now thinks it would be a cheaper option to take all the costs on itself, write them off, rightsize the two cleaned up businesses and sell them off (or float them if the clean up is believable).
The two businesses had cash earnings of $147 million in the December half-year and funds under management at 31 December around $132 billion – while that was peanuts in the context of the CBA group, which generated underlying cash earnings of $4.7 billion in that period, the reputational damage of extra costs, a possible court action, and possible damages would have been highly embarrassing for the CBA.
Call the suspension a postponement, or better still, a bit of insurance.
CBA shares eased a touch to $72.93 yesterday.