CBA provided a breakdown of the previously-disclosed $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 heart of the demerger.
Providing some insight into how inadequate its systems and processes were, and how expensive it is to administer the compensation of customers for misconduct on such a grand scale, it has cost more in program costs and internal process improvements – $650 million, to be exact – than the $610 million paid so far to affected customers.
The size, complexity and ongoing nature of the remediation effort by itself would have made a demerger this year quite problematic even if CBA, as it planned to, provided the split-off new company “NewCo” with a $200 million indemnity for any further wealth management issues.
Offering its shareholders shares in a new company with new leadership, grappling with the legacy issues from its past while having to absorb the recommendations of the financial services royal commission, might have distanced the wealth management business and its issues from the bank , but dumped them and the associated uncertainties on its shareholders.
There’s also, of course, a federal election looming, and already a divergence between the two major parties on how to deal with the royal commission’s recommendations on mortgage broking commissions. The government says it will retain them, including trailing commissions, Labor appears inclined to abolish them.
With NewCo including CBA’s Aussie Home Loans business as well as stakes in CountPlus and Mortgage Choice, a demerger would have taken the regulatory uncertainty and legislative risk of mortgage broking from the bank to NewCo shareholders.
In fact, the regulatory and legislative environment around not just mortgage broking, but wealth management generally, is fluid.
The election and a likely victory for Labor add to the uncertainties and risks. Labor has raised a lot of political capital from its bank-bashing and shows no signs of relenting.
CBA’s retail investment and superannuation platforms and advice businesses may therefore not only be impacted by the royal commission’s recommendations. There’s also the potential for politicians to make other changes to a system that the commission and its reputational damage to the bank and AMP-administered retail funds have already tilted towards the big industry funds.
Too many question marks
In other words, there were just way too many question marks hovering over the businesses within NewCo to consider a demerger this year. The plan stays alive, but the divestment might be several years away – or the businesses could be sold, piecemeal, to trade buyers over time.
For CBA, the demerger was less meaningful after it sold its global asset management business, CFSGAM, to Mitsubishi UFJ Trust late last year for $4.13 billion.
CFSGAM was originally going to be a core part of NewCo and the sale of the more glamorous element of the demerger entity effectively meant the earnings base for NewCo was nearly halved.
What’s left is still quite sizeable – NewCo had cash earnings of $147 million in the December half-year and funds under management at 31 December of nearly $132 billion – but is inconsequential in the context of the CBA group, which generated underlying cash earnings of $4.7 billion in that same six-month period.
In the circumstances, pressing ahead with the demerger of the shrunken NewCo would have been an unneeded distraction for Comyn and his team, who have enough distractions of greater substance to deal with.
It would also have handed NewCo’s chief executive, Jason Yetton, recruited to the role only last October, the daunting task of trying to manage its businesses and their vast pile of legacy issues through a shifting and complex environment this year and even beyond as he tried to sell its investment proposition to CBA shareholders and the wider market.
Within CBA the costs and uncertainties are, while not immaterial, line items in the bank-dominated results. In a demerged NewCo, they would have been very material.
Suspending the demerger shouldn’t have been a particularly difficult call.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.