CBA under pressure to restructure Colonial First State demerger

Commonwealth Bank is expected to face pressure to restructure its planned $3 billion Colonial First State demerger because of the decision to include mortgage broking and financial advice in the new company.

The bank, Australia’s largest by market capitalisation, refused to comment yesterday on the likelihood that the major transaction would be sent back to the drawing board following the royal commission’s final report.

The Hayne report recommended that trailing commissions for the mortgage broking and financial advice industry be abolished, a move that would deliver a substantial blow to CBA’s demerged business.

Under its existing plans, the NewCo, as it’s referred to by CBA, is primarily made up of Colonial First State, which has $138 billion worth of funds under advice and 10,000 advisers.

The Coalition has indicated that financial planners will have up to three years to keep charging the commissions before the remuneration system is overhauled.

The other major part of NewCo is Aussie Home Loans, which has 1000 mortgage brokers, a 16.5 cent stake in Mortgage Choice, a 35.9 per cent holding in planning firm CountPlus and Count Financial, which has 770 financial advisers. The Mortgage Choice share price dived 25.2 per cent yesterday, as investors ignored the company’s warnings that the royal commission would give the major banks more power in the residential lending market.

On those numbers, CBA’s demerged assets are in the eye of the storm following the royal commission and there are now questions on how the bank will proceed with the transaction.

The prospect of the deal being re-cut is now being examined, with the revenue streams of the new business under pressure.

Bankers believe CBA is also risking a reputational hit pressing ahead with a demerger that gives its shareholders stock in a struggling business.

Analysts have criticised the decision to include Aussie, Mortgage Choice and Count since the demerger was announced in June last year and believe there is now a greater chance that the mortgage broking assets will be hived out of the deal.

The question on that front is whether there would be a buyer for Aussie and the Mortgage Choice stake and, given the financial market reaction to the commission ban yesterday, the answer, at least for the moment, is probably not.

The demerger is set to proceed in the second half of the year and the bank’s first-half results today will be closely watched for an update on the transaction.

One key aspect that analysts will be looking for is whether CBA allocates more capital to the demerged business, which some observers believe could be more likely to happen, especially as the asset’s future growth prospects remain uncertain.

CBA is being advised on the demerger primarily by UBS while JPMorgan and Goldman Sachs are understood to have small roles on the deal.