NAB to offload wealth business MLC as profit slips

National Australia Bank chief executive Andrew Thorburn concedes owning a financial advice and asset management businesses is exposing the bank to excessive "complexity", which is damaging the experience of its customers, and hiking costs.

However, Mr Thorburn insists shock revelations at the royal commission did not influence NAB's decision to offload the remainder of its wealth business MLC, a deal which could be worth about $3 billion.

National Australia Bank chief executive Andrew Thorburn.Credit: Daniel Munoz

In a historic move that will slash the bank's exposure to the troubled wealth sector, NAB on Thursday said it would aim to de-merge MLC by the end of next year, potentially through a stockmarket listing.

MLC was bought by NAB in 2000 for $4.5 billion and holds its financial advice, superannuation and funds management businesses. The decision is the latest sign of  the major banks' exodus from the troubled wealth sector.

In its half-year results on Thursday, NAB also confirmed the softer revenue backdrop facing the banks, as it reported a 16 per cent fall in cash profit to $2.76 billion due to restructuring costs. Excluding one-off items, its cash earnings were down 0.2 per cent to $3.3 billion.

NAB had already cut its exposure to wealth by selling 80 per cent of its life insurance arm to Nippon Life, in a deal that allows NAB to distribute the insurance policies, and Mr Thorburn said a similar arrangement was likely once MLC had been demerged.

“We do think serving the wealth needs of our clients is important, but we have to do it differently. I think divesting this will simplify the bank dramatically. Right now I think the cost of complexity is really high in terms of mistakes and customer experience,” he said.

Mr Thorburn stressed that independent ownership of MLC would benefit the wealth company, and said the royal commission had not influenced the decision, as the problems it uncovered raised with respect to NAB were already known by the bank.

“We would not make a decision that’s this major based on you know, a couple of weeks of evidence at royal commission – respecting the royal commission’s importance," Mr Thorburn said.

Even so, some analysts said it was likely the damaging revelations about financial advice being exposed at the royal commission may have influenced the move - which was generally supported by bank watchers.

Shaw and Partners Stockbroking analyst Brett Le Mesurier said selling off MLC made sense for NAB, and the royal commission had exposed the high reputational and compliance costs that came with owning a wealth business.

"I don't think it's coincidental that the final decision to sell it off was made after the royal commission has started," he said. "It's clear from the royal commission that it's just too hard to manage. There's not enough value created for the risks created with owning it."

Australian banks have faced a string of scandals in financial advice, including fee rip-offs and misconduct by staff, alongside weak returns from their wealth businesses. With Commonwealth Bank and ANZ Bank also selling wealth assets, Westpac is the only big four bank still committed to the business.

As well as the reputational damage and compliance risks, another reason why banks are getting out of wealth management is because regulations require banks to set aside more capital against their wealth arms, compared to if the business is independently owned.

CLSA analyst Brian Johnson estimated MLC was worth at least $3 billion, and it made sense to sell because of the capital treatment of bank-owned wealth businesses.

"It has not been the amazing investment they made out when they bought it," Mr Johnson said.

Costs were a key focus in the result, after NAB six months ago announced a plan to cut 6000 jobs by 2020. On Thursday, it said 1050 full-time staff had left the bank at the end of April. Expenses were up 25.3 per cent, which it said was the result of extra investment, which it announced alongside the job cuts six months ago.

NAB's charge for bad loans fell 5.3 per cent to $373 million, a benefit that goes straight to the bottom line.

As the industry comes under ferocious scrutiny from the royal commission, Mr Thorburn said banks were operating in “unprecedented times”, which presented the industry with a “burning platform” to make major changes to regain the public’s trust.