Have CBA Saved Themselves from Regulators’ Wrath?

The Royal Commission currently investigating the banking and finance industry, has been an eye opener for all Australians.

It has brought the greed and dishonesty of the banks out into the light.

Now, it seems that the Commonwealth Bank of Australia want to change their attitudes towards banks. Whether this new approach lasts remains to be seen.

In a shock announcement, CBA’s new CEO Matt Comyn has announced that he will split Australia’s biggest bank.

In effect, this means he will spin off ‘the bank’s wealth, financial advice, mortgage broking and superannuation businesses’.

This came as a shock to many.

Now, most of the big banks in Australia practice something called ‘vertical integration’.

So what is vertical integration?

Vertical integration allows the bank to offer every financial service to their customers. That means you can go to your primary bank and they’ll give you financial advice, banking services, insurance, brokering, superannuation, credit cards, loans and the list goes on.

Now, the big four in Australia all offer these services. But as we’ve seen in the Banking Royal Commission this year, that’s not necessarily a good thing. 

The decision by the CBA to split, is their attempt at becoming a better bank for its customers. But while the CBA claim this to be the case, we speculate that there may be another reason.

The CBA split could be due to the fear that government regulators may step in and break up the CBA on terms not favourable to the bank. The demerger will go a long way to address the conflicts of interest between CBA’s various departments, an issue that has seen increased scrutiny in recent months. CBA may have decided to get in before regulators, and split up the bank on their own terms. But, as I’ve stated above, that’s just speculation.

CBA will effectively halve themselves, creating a whole new company. CFS Group will list on the ASX as a separate entity. CFS Group will have no formal or financial link to CBA.

What will CFS Group look like?

According to the ABC, these financial services and products will all now come under the independent CFS Group:

  • Aussie Home Loans — CBA’s mortgage broking business
  • Colonial First State — its superannuation, investment and retirement business, which manages more than $135 billion in funds
  • Colonial First State Global Asset Management (CFSGAM) — which manages more than $207 billion worth of global investments
  • Count Financial and Financial Wisdom — its financial advice businesses
  • CBA’s minority stakes in Mortgage Choice and investment advice company CountPlus

As Alex Dunnin, head of research at financial services research at Rainmaker, told The New Daily that the split of CBA was a ‘huge’ undertaking, ‘taking the CBA back 20 years to the days when it was just a (very big) bank.’

Dunnin further cited his wish to keep CommBank out of the headlines:

Carving up the integrated CBA wealth businesses so extensively may … be an implicit admission that it’s just not possible, or not possible without huge effort over a long time, to properly and transparently clean up the perceptions of conflicts of interest

And even if they could set up mechanisms to manage these, would they be at such a level that it would pass scrutiny of cross examination at a royal commission and keep them out of the newspaper headlines?

What is the overall outlook for CBA?

The CBA also said in a statement that the reason they were separating the business is because they believe the ‘CFS Group will benefit from a separate listing and ability to pursue its own strategies’. And therefore, the CBA will ‘focus on its core banking businesses in Australia and New Zealand’.

With the demerger set to happen next year, assuming everyone agrees on the separation of the CBA, what does this mean for you?

After the announcement of the split, CommBank shares fell. However, that is not expected to be a lasting issue.

If you are a shareholder in the CBA, then you will also receive shares in CFS. So how many shares could you receive? Well according to the bank, as reported by the ABC, ‘CBA shareholders will receive shares in CFS Group proportional to their existing CBA shareholding’. You should receive one CFS share for every CBA share you own.

The big question that remains, is if this demerger will be enough to save CBA from the wrath of regulators — and the public.

This week in Money Morning

In Monday’s Money Morning, Harje looks to the world of online retail. Specifically Amazon. Now, the Australian government brought in new tax laws for online retailers and Amazon returned fire by disallowing Aussie customers to shop on their US sites. Now US President Donald Trump wants the same for the US. However, is it really punishing Amazon, or is it a disservice to consumers? To find out more, go here.

In Tuesday’s Money Morning, Harje discusses how Americans feel and advise on the looming ‘trade war’. The Wall Street Journal claims you should sell all of your Chinese stocks. But, is that really what you should be doing? Harje explains that, that’s probably not the best avenue. To find out what he believes you could do with your stocks, and where you may find the potential to increase you gains in the markets, go here.

On Wednesday, Harje explained why blockchain could become so important to the investing world. Blockchain is growing and it seems that the science community is now accepting blockchain as a platform for their research and biotech goals. Blockchain can help find the data they need and make breakthroughs in the medical industry. To find out more about how blockchain is helping industries, click here.

In Thursday’s Money Morning, Harje looks at the continued trade war back and forth happening between the US and China. Now, China isn’t going to give up easily, nor will the US, so Harje explains how the markets may be affected. To find out more about how Harje views the future of the markets throughout this ongoing spat between two of the biggest economies in the world, go here.

In Friday’s Money Morning, Harje focuses on why China doing well in the trade sector is actually a benefit for the US. Now, the US and President Donald Trump believe they’re doing right by the American people, however, Harje argues that the stronger the Chinese economy is, the better it is for US trade. To find out more about Harje’s views on US and China trade, and how it can benefit countries globally, go here.

 

Kind regards,

Alana Sumic,
Editor, Money Weekend


Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Port Phillip Publishing’s many other publications. As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Port Phillip Publishing’s political publication, The Australian Tribune.


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