Commonwealth Bank of Australia (ASX: CBA) this morning announced a sale of its life insurance division and a possible sale of its funds management arm. The company’s scandal-plagued Australian life insurance division Comminsure Life and its New Zealand equivalent Sovereign have both been sold to major insurer AIA Group for $3.8 billion.
The transaction reflects a fair sale price of 16.9x 2017’s earnings, and 1.1x the embedded value of both businesses. Management expects to book an accounting loss of $300 million after tax, primarily due to the carrying value of ‘goodwill’ (which reflects brand value) being higher than the sale price.
This divestment will result in a significant improvement in Commbank’s CET1 ratio (a measure of how well-capitalised it is; higher is better). The insurance divisions accounted for around 2% of Commbank’s profit after tax last year.
Elsewhere, the bank also announced that it is reviewing a variety of options for a possible divestment of its ‘CFSGAM’ fund management business, better known as Colonial First State Global Asset Management. CFSGAM has $219 billion in assets under management, and management will consider whether the bank’s interests would best be served via IPO, sale, or some other avenue. Wealth management accounted for 9% of Commbank’s revenues last year, so a sale would likely have a meaningful impact on earnings.
My view is that the bank is potentially looking to avoid further fallout from scandals at its wealth management and life insurance arms. These industries have been tainted by high-profile issues, and have also come under fire for potential conflicts of interest. For example, CFSGAM/insurance employees may be incentivised by the amount of business that they write, rather than on what’s best for the customer. Commonwealth Bank could be looking to reform its act in the face of what’s been an increasing pile of scandals and public scorn.
For now though, only the life insurance business has been sold, and the impact on the company’s profits should be fairly minimal.