Offshore groups most likely to buy Colonial First State

Sep 21, 2017

Commonwealth Bank's plan to dispose of Colonial First State is part of an industry consolidation that means any buyer would almost certainly come from outside Australia.

Offshore groups most likely to buy Colonial First State

Commonwealth Bank of Australia's (CBA) plan to either sell or list its asset management division Colonial First State is likely to attract the attention of ambitious offshore asset managers wanting to bolster their international operations, say industry executives.

The Australian bank revealed its consideration of a sale through a statement to the Australian Securities Exchange on Thursday (September 21), a day after announcing that it was selling its life and health insurance units to Hong Kong-based insurer AIA for $3 billion.

Industry observers told AsianInvestor that any potential buyer for Colonial First State, which has $175 billion under management globally, would have to be an offshore player looking to build scale.

The ex-Australia parts of Colonial First State have become an increasing focus for growth, with the fund manager specialising in particular in global fixed income and emerging markets.

One Hong Kong-based funds industry player described this offshore business, and particularly the UK arm, as “the jewel in the crown” for any potential buyer. “That business on its own would be attractive to someone”, he said.

"Colonial First State will go [in a sale], and it would have to be to an offshore group," agreed another Australian funds industry executive.

The fund house possesses affiliated operations in the UK, Hong Kong and Singapore (where it is known as First State Investments) as well as in its home market. It employs over 800 people and has fund managers in 16 different locations.

First State Investments was estimated to have $118.8 billion AUM in Asia Pacific in AsianInvestor’s latest AI100, making it the 23rd largest asset manager in the region by AUM.

Domestic pressure

The division as a whole throws off reliable profits; CBA reported that its funds management income was A$2.34 billion ($1.86 billion) for the financial year ending June 30, versus A$2.32 billion the previous year and A$2.4 billion the year before that.

But the second executive cautioned that while the offshore parts of the business are appealing, offshore players may be less entranced by Colonial First State’s operations in its home market.

"[They] won’t get synergy by buying the Australian part of the business, which is under huge pressure from fees, margins and the move to passive," he said.

Australia’s financial service industry is in the midst of a consolidation phase, with local banks keen to offload asset management and life insurance businesses.

"Australian financial services firms are getting out of financial services," said the Hong Kong executive. "Everyone’s selling their life businesses, and going back to being banks."

Westpac sold BT Investment Management in 2008, and since then has tried to sell Hastings Fund Management and its fund of funds platform, Ascalon. National Australia Bank sold its life insurance arm to Nippon Life two years ago. ANZ has also taken the decision to sell its non-core businesses.

IPO option

Although there is speculation as to which organisation could bid for Colonial First State, it’s possible that CBA could opt for an IPO. Price to earnings multiples for Australian asset managers are some of the highest in the world, at about 18 times, despite the pressures the players are under.

"They are probably not going to get a better price than IPOing it," said the Hong Kong executive.

CBA’s sale or listing of its asset management arm would mark the second part of a strategy to exit its major non-banking services. Hong Kong-based life insurer AIA agreed to acquire CBA’s life and health businesses in Australia and New Zealand, in a deal that includes a 20-year bancassurance deal utilising CBA’s distribution network.

Once concluded, the purchase will make AIA the dominant player in both Australia and New Zealand for life and health insurance.

In the filing to the Hong Kong Stock Exchange, Ng Keng Hooi, AIA’s group chief executive and president, said “The proposed bancassurance partnership will materially expand AIA’s distribution capabilities and customer reach in Australia and New Zealand.”

CBA is the largest retail bank in Australia, and CBA’s wholly-owned subsidiary, ASB, is the second-largest retail bank in New Zealand, with a combined total of 13 million existing bank customers and more than 1,200 branches.