Australia | Sep 15 2006
By Chris Shaw
Banking shares traditionally are seen as defensive investments, the companies offering solid if not spectacular earnings growth and attractive dividends suitable for those wanting consistent performance without a lot of volatility.
What if there was a way to boost returns for shareholders available to the major banks that has not been factored into market forecasts? There is, according to SB Citigroup, which sees potential for at least a couple of the major banks to create significant value via a spin-off of their funds management operations.
The broker sees the current environment as a good one for such a move for a couple of reasons. Firstly, funds management has not been the driver of earnings growth the banks expected when they began pouring resources into such operations a few years ago. Rather, the re-ranking in the sector in Price/Earnings terms has been driven more by traditional banking operations, with wealth management lagging in terms of the impact on profits.
Secondly, it notes with the renewed focus on superannuation as a saving strategy and the current relatively healthy state of the financial markets, in timing terms making such a move now appears to make sense. Supporting such a view is the fact pure managers such as Perpetual Trustees (PPT) are trading on far higher multiples than the banking sector.
In its view such an approach would also makes sense for the banks in that they could then use options such as share entitlements to retain key staff, while it would also help avoid problems such as the independence of the advice being given, an issue AMP (AMP) is currently dealing with.
The broker suggests most potential for such action lies in Westpac (WBC) and Commonwealth Bank (CBA), as these two have the largest asset management operations. The potential benefits for shareholders could be significant, as the broker has explored two scenarios, one where only the asset management operations are floated, the other including the platforms used in the respective divisions.
If only the asset management operations themselves are hived off the broker estimates the possible selling prices are in the range of $3.2-$3.8bn for CBA and $1.7-$2.0bn for Westpac, which in cents per share terms creates additional value of up to $0.99 and $0.44 respectively.
If the platforms were included, the broker estimates selling prices of $8.4-$10.5bn and $4.4-$5.5bn, or value creation of as much as $3.62 and $1.50 respectively, which is far from bad for a defensive investment.
The broker continues to recommend both Westpac and National Australia Bank (NAB) as its picks in the sector, rating both stocks as Buy compared to Hold ratings for CBA and ANZ Banking Group (ANZ).
This view is broadly in line with the wider market, as the FN Arena sentiment indicator shows WBC and ANZ as enjoying the most positive ratings at 0.3, compared to 0.2 for NAB and minus 0.2 for CBA.