There were many reasons Australia’s banking giants decided to divest from their wealth management arms in 2018, but declining profit was not one of them, consulting firm PwC has shown.
Despite the issues financial institutions had running their wealth management businesses, as revealed by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, wealth management income was “up at $5 billion on a continuing basis, up 8.8 per cent YoY and 6.6 per cent (half on half), PwC’s latest sector report, Banking Matters, states.
“It would be incorrect to suggest that banks divested wealth purely because of concerns about the profitability of these businesses,” PwC Australia banking and capital markets director Jim Christodouleas says.
The PwC report – published in November last year – paints a strong picture of the financial position the banks’ wealth divisions were in when they were offloaded.
Much of the rationale for the banks’ divestment from wealth had to do with natural market forces, Christodouleas says.
“It would be the combination of inflows, outflows and movements in asset values that changed the quantum of the funds being managed,” he notes. “As funds go up and down, income will go up and down, even if nothing else changes.”
After ANZ Banking Group sold the lion’s share of its planning groups to IOOF in late 2017, NAB handed the reins of its own wealth group to MLC in May before Commonwealth Bank announced a similar move, forming CFS Group to run its largest advice groups.
The reasons for these divestments are well known; among them are reputational damage stemming from revelations leading up to and during the royal commission, increased competition in the platform space and the adviser exodus to self-licensing. Regulatory pressure bit deep into revenue streams, too, with MySuper legislation forcing banks to offer low-fee default accounts and the Future of Financial Advice (FoFA) laws restricting lucrative commissions.
PwC’s Christodouleas notes that the banks were also keen to reallocate the capital their wealth divisions required. “Giving up that income stream releases capital, which can be redeployed to businesses seen as more core,” he explains.
The banks’ willingness to part ways with a portion of an annual $5 billion income underscores how important these core drivers are.
None of the decisions would have been made in isolation, Christodouleas explains.
“It’s not just a question of the difficulty and cost of remediation. If you’re a banker, you have to make an assessment of that relative to everything else going on in your business in the context of limited resources, including capital, [capital expenditure] and, probably most importantly, execution bandwidth,” he says. “You have to make choices.”