CBA sells majority Colonial stake to KKR for $1.7 billion

The Commonwealth Bank has sold a majority stake in its superannuation and investment arm Colonial First State to private equity firm KKR for $1.7 billion, in a further move to slash its exposure to the wealth sector.

CBA on Wednesday told investors it aimed to focus more closely on its core banking operations, as it revealed the sale of 55 per cent of Colonial First State to KKR, in a deal that valued the whole of Colonial at $3.3 billion.

CBA chief executive Matt Comyn said the deal would result in a more focused CBA, while Colonial would have greater capacity to invest in products and digital systems, giving members better value for money.Credit: Peter Braig

The sale of Colonial comes as all of the major banks have been cutting their exposure to wealth management, including financial planning and life insurance, following a series of scandals that left the banks with hefty compensation bills.

Reflecting these ongoing costs, CBA on Wednesday said its bottom line would absorb an extra charge of $135 million for banking and wealth customer refunds.

Chief executive Matt Comyn said the deal would result in a more focused CBA, while Colonial would have greater capacity to invest in products and digital systems, giving members better value for money.

The bank has also slashed exposure to life insurance, funds management and financial planning, and it had considered selling off all of Colonial. However, Mr Comyn said there were positive aspects to retaining a stake, including the steady stream of 9.5 per cent of wages that workers must funnel into super.

"We still believe it’s an attractive business and segment. Clearly it’s got a structurally high mandated growth rate of 9.5 per cent. We believe bringing in the combination of patient capital and global capability to that business will allow us to increase the level of investment and make an even stronger proposition for members," Mr Comyn said.

Private equity firms such as KKR typically hold assets for five to seven years before re-selling them, but Mr Comyn said one of KKR's founders had told him the firm's investment horizon was up to 12 years. He acknowledged KKR would eventually want a return on its investment, but said this would require investment, and CBA was comfortable retaining a 45 per cent stake in Colonial over the foreseeable future.

“Ultimately they’d be looking for a return on that investment but it is a business that’s going to require investment and patience to be able to deliver a good overall outcome over the long-term,” Mr Comyn said in an interview.

The bank and KKR are pledging to invest in the wealth business, which they say will benefit Colonial's 1 million members by simplifying products, improving service, and upgrading its technology systems.

Partner and head of KKR Australia, Scott Bookmyer, said: "Partnering alongside CBA, we look forward to accelerating CFS’s transformation and further strengthening its market position to deliver long-term benefits to its member base.”

The sale will require the approval of the Foreign Investment Review Board and the banking regulator, and CBA said it expected the deal to be completed in the first half of 2021.