Commonwealth Bank to Sell Stake in Wealth Management Arm to KKR -- Update

   By Alice Uribe

SYDNEY--Commonwealth Bank of Australia has agreed to sell a majority stake in its wealth management arm Colonial First State to global investment firm KKR & Co. Inc., while setting aside 1.5 billion Australian dollars (US$969 million) to address future impacts of the coronavirus pandemic.

The bank, Australia's biggest by market value, said the sale of a 55% stake implies a total valuation for CFS of A$3.3 billion. It expects to receive cash proceeds of approximately A$1.7 billion from KKR.

The move is part of Commonwealth Bank's plan to focus on its core banking businesses. The bank said it would work with KKR on the separation of CFS from the wider group and the creation of a standalone business over the medium term.

"Commonwealth Bank intends to maintain its shareholding in CFS throughout this period and will further assess its longer-term intentions thereafter," it said.

On Wednesday, the bank also reported an unaudited net profit of about A$1.3 billion in the three months through March. No comparable figure was released, but it represents a drop of about 26% from the A$1.75 billion profit reported a year ago.

Cash earnings--the measure followed by analysts that strips out items including hedging volatility and losses or gains on acquisitions and asset sales--totalled A$1.3 billion.

The bank also lifted provisions amid the ongoing Covid-19 pandemic, setting aside A$1.5 billion for potential loan losses. Total provisions now stand at A$6.4 billion, representing a coverage ratio of 1.65% to total credit risk weighted assets.

Lenders including Australia & New Zealand Banking Group Ltd. and Westpac Banking Corp. reported large falls in profit for the six months through March and sharply higher provisions as they grapple with the impact of the ongoing pandemic. ANZ and Westpac have also deferred decisions on dividends until the economic outlook is clearer.

Westpac last week said provisions for expected credit losses include A$1.6 billion set aside for the coronavirus impact. National Australia Bank Ltd. has made a A$807 million provision, while ANZ is estimating A$1 billion of credit losses tied to Covid-19.

Commonwealth Bank, which has a market value of more than A$105 billion, said operating income for the latest quarter was flat, driven by core volume growth, but offset by the impacts of a lower cash rate. Headline Operating expenses were 5% higher due to A$135 million in additional customer remediation provisions, or down by 1% if one-time items are stripped out.

Chief Executive Matt Comyn said the bank maintained a "strong capital position," enabling it to deliver half-year dividend payments totalling A$3.5 billion. He said the additional credit provision of A$1.5 billion for potential Covid-19 impacts "further reinforces our already strong provisioning and balance sheet settings."

Commonwealth Bank said it continued to monitor its lending portfolios and was conducting detailed portfolio stress testing during the pandemic, noting it was difficult to provide a "definitive assessment" of longer-term outcomes. It recorded a loan-impairment expense of A$1.6 billion in the quarter, which equates to 80 basis points of gross loans and acceptances. This expense includes the additional Covid-19 provision.

Troublesome and impaired assets increased to A$8.1 billion, from A$7.2 billion a year ago.

The bank's closely watched Common Equity Tier 1 capital ratio stood at 10.7% at the end of March, after the payment of the half-year dividend and the Covid-19 provision.

Write to Alice Uribe at alice.uribe@wsj.com

(END) Dow Jones Newswires

May 12, 2020 20:27 ET (00:27 GMT)

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