IOOF Gains As ANZ Divests Wealth Business

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ANZ Bank will sell part of its wealth management business to IOOF for $975m. Brokers suggest the deal is not optimal for ANZ but should provide further scale for IOOF.

-Brokers surprised at the separation costs involved
-Will ANZ be able to sell the life business on a standalone basis?
-Issues ahead include low organic growth of the ANZ wealth division
 

By Eva Brocklehurst

The acquisition of ANZ Bank's ((ANZ)) OnePath pension & investments and aligned dealer group businesses should provide material accretion for IOOF ((IFL)), although this will not be fully realised until FY21. Meanwhile, ANZ, for $975m, has offloaded a small earner and its CET1 capital ratio is expected to increase by around 15 basis points on completion of the sale, expected in around 12 months.

Deutsche Bank suggests the bank would have probably preferred to divest the wealth management business in its entirety noting, based on current disclosure, the divested assets contribute only 0.5% of group net profit.

Given ANZ is already well-positioned for APRA's requirements, Deutsche Bank assumes it will return the sale proceeds to shareholders in FY19 via a share buyback. Moreover, now life insurance can be sold on a cleaner basis a sale may be easier to achieve than previously.

Morgan Stanley has reduced confidence in ANZ's revenue recovery and assesses, while it offers an improving return on equity and has committed to cost reductions, its relatively strong capital position and sustainable dividend payout ratio are reflected in current trading multiples.

The segments of the wealth business that are not included in the transaction include life insurance, general insurance, life company products, financial planning and lenders mortgage insurance.

UBS is somewhat disappointed by the announcement, having hoped the bank would have sold off a larger proportion of its wealth management business by now. The broker, too, considers much of the upside from divestments and potential capital returns is now factored into the share price.

The bank has calculated the accounting loss on the sale to be around -$120m, based on separation and transaction costs of $300m post-tax and an accounting adjustment of around $500m for treasury shares.

The headline price appears reasonable and the impact on earnings not material but Macquarie is surprised with the quantum of separation costs. Despite the complexities associated with this separation, the amount relative to the sale price appears abnormally large to the broker. Ultimately, Macquarie expects the impact to be broadly neutral to earnings, assuming a $600m buyback and around -$50m of stranded costs for ANZ.

Ord Minnett suggests, given the uncertainty regarding the potential sale of the remaining wealth business, there is a risk the bank may need to delay its buyback. However potential suitors for the life insurance business, which may have been put off by the level of integration between the OnePath pensions & investments and life insurance, could be more interested once separation is completed.

Credit Suisse is also disappointed, given the lengthy separation time involved, which could delay any divestment of life insurance. As well, the prospect of the bank undertaking a substantial buyback in the near-term has diminished.

Life Insurance

ANZ has reiterated a commitment to withdrawing from insurance. Morgans believes, ideally, the life insurance business could have been sold along with pension & investments, and expects it will be more difficult to sell on a standalone basis for an acceptable price. Still, given the magnitude of separation costs associated with this transaction, costs associated with a potential future sale of the life business will likely be much lower.

Credit Suisse suggests ANZ has been out-manoeuvred in its divestment of life insurance by both National Australia Bank ((NAB)) and Commonwealth Bank ((CBA)), as it is hampered by the quality of the assets and complexity of the transaction. A piecemeal divestment, the broker suspects, was never ANZ's preferred option.

ANZ has entered a 20-year strategic distribution agreement to make IOOF superannuation and investment products available to customers and will receive small ongoing payments. The bank retains its financial planning business and private bank.

IOOF Outlook

From the IOOF perspective the acquisition significantly enhances IOOF's scale but UBS believes value implications are somewhat less, given the low organic growth prospects of ANZ's wealth division and a lack of net fund flows and margin compression. This compounds similar, less pronounced, issues in IOOF's existing business. Nevertheless, the deal is more accretive than UBS expected and should boost earnings per share by over 20% once fully integrated.

With near-term dilution as funds are raised, and material accretion not fully realised until FY21, Citi suggests this presents a risk that the business could deteriorate in the interim, although IOOF contends that after significant restructuring and a significant hit from MySuper changes the business has now reached a relatively steady state.

As ANZ made very little money from advice and a large proportion of the acquired business came from the platform operation, the acquisition pushes IOOF's earnings back towards platforms relative to advice, and reverses the trend of recent times.

Nevertheless, the broker flags the fact the company has a solid track record of integrating platform business. Macquarie suggests ultimately IOOF will need to reverse the negative revenue trends in the acquired businesses in order to extract the full value from the transaction.

FNArena's database shows three Buy ratings and five Hold for ANZ. The consensus target is $30.75, suggesting 1.2% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 5.3% and 5.4% respectively. There are four Hold ratings and one Buy (Credit Suisse) for IOOF. The consensus target is $11.64, signalling -0.1% downside to the last share price. The dividend yield on FY18 and FY19 forecasts is 4.6% and 5.3% respectively.

This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.

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