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Wealth business pays off for banks

New Zealand banks may be reluctant to let go of their wealth businesses because of the profitability of those segments.

Thursday, January 17th 2019, 6:00AM 1 Comment

A report by PwC into New Zealand’s banks’ Australian parents said they were simplifying, streamlining and rethinking their business architecture, by divesting their insurance, asset management, wealth and other associated businesses.

All the major banks have made, or signalled, such a move: Westpac’s chief executive in Australia blamed a “dramatic rise in compliance costs” forcing him to reconsider his commitment to a full-service wealth operation.

CBA, parent of ASB, revealed in June a demerger including its wealth management and mortgage broking businesses. NAB outlined plans to sell MLC and ANZ is selling much of its planning business to IOOF.

PwC said the banks had spent the past year revisiting some business fundamentals, including the economic returns available for investors and the personal remuneration that should be given to industry participants,

But the choice to offload wealth businesses has not been made because they are unprofitable.

For 2018, banks' wealth management income was A$5 billion, 8% up on a year before. It represented almost 6% of banks' total income int he year.

The report said, notwithstanding the disclosures made by some banks of certain fees being abolished or lowered during the year, banking fees and commission and wealth management income collectively increased 5.8% year-on-year on a continuing basis.

It has been suggested that New Zealand banks might follow suit and spin off their wealth arms. ANZ has sold its OnePath insurance business to Cigna,

New Zealand banking expert Claire Matthews, of Massey University, said the wealth divisions were similarly profitable in New Zealand.

ANZ made $217 million in New Zealand net funds management income in the most recent financial year. ASB recorded $114m.

“If it wasn’t profitable, it is likely the banks would have exited the business some time ago.   The only other reason they may be interested is to increase the ‘share of wallet’ they hold, which makes the customer less likely to leave, but I don’t think that would be sufficient without an acceptable level of profit,” Matthews said.

PwC said giving up on their wealth businesses would allow the banks to focus on other areas of the business.

ASIC research into vertical integration showed 21% of vertically integrated advisers’ products on approved lists were manufactured in-house but 68% of new client money went to those products.

Tags: banks

« Doing nothing 'not an option'Tough quarter for investors, fund managers »

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Comments from our readers

On 17 January 2019 at 7:19 am Pragmatic said:
To help balance this discussion:

1. The net profit contribution from wealth management for larger institutions is close enough to being a rounding error (albeit that it is difficult to understand this from the annual reports)
2. The capital affiliated with wealth management inhibits tier 1 ratios - ie: can not be leveraged
3. Wealth management has been a PR nightmare for local large financial institutions since inception, with the Royal Commission bringing this home recently
4. Put simply - if you're an Executive of one of these firms, and your bonus is largely based on share price and staying out of trouble, then the obvious decision is to jettison the parts of the business that no longer contribute. In round numbers, this is worth an additional circa 15% to the relative share-prices.

As mentioned in earlier rambles, the decision to migrate away from wealth management is more about enhancing stakeholder benefits than simplifying business etc

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Lender Flt 1yr 2yr 3yr
ANZ 5.79 4.45 4.49 4.69
ANZ Special - 3.95 3.99 4.19
ASB Bank 5.80 4.49 4.49 4.45
ASB Bank Special - 4.09 3.99 3.95
BNZ - Mortgage One 6.50 - - -
BNZ - Rapid Repay 5.95 - - -
BNZ - Special - 4.05 3.99 3.95
BNZ - Std, FlyBuys 5.90 4.69 4.59 4.79
BNZ - TotalMoney 5.90 - - -
Credit Union Auckland 6.70 - - -
Credit Union Baywide 6.15 5.20 5.25 -
Lender Flt 1yr 2yr 3yr
Credit Union North 6.45 - - -
Credit Union South 6.45 - - -
Finance Direct - - - -
First Credit Union 5.85 - - -
Heartland 6.70 7.00 7.25 7.85
Heartland Bank - Online - - - -
Heretaunga Building Society 5.75 4.70 4.85 -
Housing NZ Corp 5.80 4.69 4.79 4.79
HSBC Premier 5.89 3.99 3.99 4.39
HSBC Premier LVR > 80% - - - -
HSBC Special - 3.69 3.69 3.95
Lender Flt 1yr 2yr 3yr
ICBC 5.79 3.99 3.99 4.49
Kiwibank 5.80 4.80 4.94 ▼4.84
Kiwibank - Capped - - - -
Kiwibank - Offset 5.80 - - -
Kiwibank Special - 4.05 3.99 ▼4.09
Liberty 5.69 - - -
Napier Building Society - - - -
Nelson Building Society 6.10 5.10 5.45 -
Resimac 5.30 4.86 ▼4.46 ▼4.69
RESIMAC Special - - - -
SBS Bank 5.89 4.85 5.05 5.49
Lender Flt 1yr 2yr 3yr
SBS Bank Special - 4.05 3.99 4.49
Sovereign 5.90 4.49 4.49 4.45
Sovereign Special - 4.09 3.99 3.95
The Co-operative Bank - Owner Occ 5.75 3.99 4.15 4.35
The Co-operative Bank - Standard 5.75 4.49 4.65 4.85
TSB Bank 5.80 4.55 4.49 4.65
TSB Special - 4.05 3.99 4.15
Wairarapa Building Society 5.70 4.85 4.99 -
Westpac 5.95 4.69 4.79 5.19
Westpac - Offset 5.95 - - -
Westpac Special - 4.05 3.99 3.95
Median 5.89 4.49 4.49 4.47

Last updated: 17 April 2019 8:49am

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