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Morningstar | Commonwealth Bank Surprises with the Sale of the Global Asset Management Business

Wide-moat Commonwealth Bank of Australia surprised with the announced sale of the Colonial First State Global Asset Management, or CFSGAM, or as it is known outside Australia, First State Investments, to Japanese financial conglomerate, Mitsubishi UFJ Trust and Banking Corporation, or MUTB, for a total cash consideration of AUD 4.13 billion. We see the sale as a good result for Commonwealth Bank with the sale multiple of 17.5 times Colonial First State Global Asset Management’s pro forma fiscal 2018 cash profit of AUD 236 million. This clean sale is a very good outcome for Commonwealth Bank shareholders.

Australian listed asset managers we cover are currently trading on one-year forward P/E multiples around 13-15. The estimated sale proceeds equate to a post-tax gain on sale of approximately AUD 1.5 billion including estimated post-tax separation and transaction costs of approximately AUD 100 million. We have not adjusted our earnings forecasts or AUD 83 fair value estimate to reflect the announced sale. At current prices, the stock remains undervalued, trading 17% below our valuation.

We were surprised with the sale announcement as Commonwealth Bank had previously indicated the global asset management business would be packaged with Commonwealth Bank’s aligned wealth management business and mortgage broker businesses and demerged by the end of calendar 2019. The sale to MUTB is subject to a wide range of regulatory approvals and is expected to complete by the middle of calendar 2019. Commonwealth Bank CEO Mat Comyn stated “MUTB is one of the largest asset managers in Japan with a long history and deep capabilities.” CFSGAM is successful investment business managing AUD 213 billion of assets under management at June 30, 2018 on behalf of clients worldwide. The sale is consistent with Commonwealth Bank’s simplification process that involves divesting noncore assets and focusing on core banking businesses to create a less complicated lower risk bank.

The sale of the asset management business is expected to result in a pro forma increase of AUD 2.9 billion in common equity Tier 1 capital, boosting the bank’s key capital ratio by approximately 0.60% on an Australian Prudential Regulation Authority basis as at June 30, 2018. Commonwealth Bank’s last reported common equity Tier 1 capital ratio was 10.1% at June 30, 2018 and when adjusted for previously announced asset sales was a pro forma 10.7%. Therefore, the adjusted pro forma capital ratio including the announced global asset management sale comfortably exceeds 11%, well above the regulators 10.5% benchmark due by January 2020.

Separately, Commonwealth Bank also announced the appointment of Jason Yetton as CEO of the bank’s wealth management and mortgage broking businesses, known as NewCo. The new entity includes Colonial First State, Count Financial, Financial Wisdom, Aussie Home Loans and Commonwealth Bank’s minority stakes in ASX listed companies CountPlus and Mortgage Choice. The demerger of NewCo is subject to shareholder and regulatory approvals under a scheme of arrangement. If approved the NewCo demerger is scheduled to complete in late calendar 2019.