Commonwealth Bank Sells Life-Insurance Businesses for $3 Billion

By Robb M. Stewart Features Dow Jones Newswires

MELBOURNE, Australia-- Commonwealth Bank of Australia is considering spinning off its global asset-management unit after announcing a US$3 billion sale of its life-insurance businesses to AIA Group Ltd.

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A sale of Colonial First State Global Asset Management would further bolster the capital position of Australia's largest bank at a time when regulators are pushing lenders to increase buffers against risk, and tightens the bank's focus as it defends itself against accusations its compliance failings allowed its accounts to be used for money laundering.

In a statement Thursday, Commonwealth Bank said it was selling all of its life-insurance businesses in Australia and New Zealand to AIA for 3.8 billion Australian dollars (US$3.05 billion). The sale agreement also includes having the pan-Asian insurer provide life-insurance products to the bank's customers for 20 years.

It adds to a number of recent moves by Australian banks to unload capital-intensive life-insurance operations to dedicated insurers better able to compete in a sector that has struggled in recent years with rising claims and policy terminations. Earlier this week, Australia & New Zealand Banking Ltd. said it was in talks with a number of potential suitors for its Australian wealth operations, which includes its local insurance, pension, investments and advice businesses.

AIA, one of the world's largest life insurers, said it would become the market leader in both Australia and New Zealand after combining Commonwealth Bank's businesses with its own operations.

AIA said Australia offers the largest life-protection market in Asia outside Japan, and that data suggested there was an estimated US$1.1 trillion gap in the provision of life insurance and mortality protection cover. The Hong Kong-listed insurer said Commonwealth Bank's businesses offer access to 13 million bank customers across Australia and New Zealand, and should offer a lift in AIA's earnings and future cost savings of at least US$60 million a year.

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For Commonwealth Bank, Australia's biggest bank by market capitalization and largest mortgage lender, the sale is expected to release about A$3 billion in capital and lift its common equity Tier 1 capital ratio by 0.7 percentage points to take it slightly above the 10.5% minimum threshold that Australia's banking regulator this year ordered the country's major banks to reach by 2020.

However, the sale will dilute Commonwealth Bank's earnings modestly and it said it expected about a A$300 million loss on the deal, largely due to the carrying value of goodwill. The businesses being picked up by AIA had earnings of about A$224 million in the last fiscal year, a fraction of the A$9.7 billion before items reported by Commonwealth Bank.

The price the bank will fetch for the businesses was slightly below expectations but it is outweighed by the longer-term benefits, particularly the increase in capital, said David Ellis, an analyst at investment-research firm Morningstar.

"It's a good outcome" Mr. Ellis said, adding it allowed Commonwealth Bank to clean up its businesses after a string of scandals.

In addition to the AIA sale deal, which remains subject to regulatory approval, Commonwealth Bank said it was reviewing its Colonial First State business and would consider a number of options, including an initial public offering. Known as First State Investments outside of Australia, the unit has more than A$219 billion in assets under management.

Commonwealth Bank is under intense scrutiny after the Australian government's financial-intelligence agency launched a civil suit, alleging more than 53,700 breaches of the anti-money-laundering and counterterrorism funding laws. The accusations largely involve failing to provide transaction reports on deposits through its automated machines, which the bank has blamed on a coding error in a software upgrade. The agency alleged it allowed millions of dollars to be laundered by drug dealers and other criminals. The case has triggered independent reviews by the securities and prudential regulators into culture, pay and governance at the bank.

Under the partnership with AIA, Commonwealth Bank said it would continue to earn income on the distribution of life- and health-insurance products. It also will retain its general insurance business and CommInsure brand.

With the sale, which the companies expect to wrap up in 2018, Commonwealth Bank's executive for wealth management, Annabel Spring, will leave the bank in December. Ms. Spring, who joined Commonwealth Bank in 2009 as head of strategy, will continue to lead the wealth-management business, the sale process and strategic review until the end of the year, the bank said.

Write to Robb M. Stewart at robb.stewart@wsj.com

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

September 21, 2017 01:49 ET (05:49 GMT)