The O'Brien Column: Financial sector builds up its muscle for global markets

By Peter V O'Brien

Friday 17th March 2000

The proposed merger of Commonwealth Bank of Australia (CBA) and Colonial was another move in the Australian financial sector's drive for increased size to achieve the appropriate asset mass and product diversification for effective participation in international markets.

Banks and other financial institutions around the world have produced merger deals that dwarfed the $A8 billion arrangement between CBA and Colonial but the latter was impressive by Australasian standards.

The issue of size was discussed in The National Business Review (August 28, 1998) in the context of the then rush of financial services' companies to acquire or merge with others.

It was noted National Mutual, for example, believed scale was an important element in going forward. The company would consider opportunities under the general heading of alliances, acquisitions and mergers.

That comment followed the failure of National Mutual and Lend Lease Corporation to merge their Australasian financial operations to create the largest non-bank financial institution in Australia.

The parties agreed to end discussions because they could not resolve issues related to the possible future ownership structure or management operating procedures.

Lend Lease went on to acquire several companies, the most recent including the Boston Financial Group, a US institutional real estate adviser, financial services group Godfrey Pembroke and 55% of Hong Kong-based CEF Life.

National Mutual expanded its business in Asia, particularly China, Singapore and the Philippines.

Colonial's report for the year ended December 31, 1999 referred to the company's acquisition of Trust Bank in Tasmania in November, acquisition of a majority share of National Bank of Fiji and a joint venture with China Life Insurance Company in Shanghai.

The group's international funds management arm, Colonial First State Investments, acquired the Asian and UK business of fund manager Nicholas-Applegate and took a 50% holding in venture capital firm Hambro Grantham.

Colonial's preliminary report referred to the company as a "diverse financial services group with core businesses in insurance, retirement savings, banking and funds management."

It had a presence in 12 markets and employed more than 28,000 staff and distributors around the world.

Colonial's profit jumped to $A455 million, a 49% increase over the $A306 million earned in 1999.

Acquisitions had an effect on the total profit but earnings a share were 26% higher at 45.9Ac.

CBA's latest full-year profit was for the ended June 30, 1999, when the bank earned $A1.42 billion, down from the previous year's $A1.6 billion, with the main reasons for the decline being a reduction in gross interest margin, an increase in bad debt provision - with a consequent additional drop in net interest income - and a $A200 million cut in "other income."

The bank is Australia's largest home loan financier and, according to Australian broking analyses, has been a leader in on-line initiatives, although customer growth in that business has recently slowed.

Merrill Lynch Australia's January issue of Australian Quarterly Stock Market Review said CBA aimed to double the contribution mix of its insurance/asset management business from a current 12% of group profit within four years.

Apart from internal growth from the current structure, it should achieve the aim after the merger with Colonial.

The proposed issue of seven CBA shares for every 20 Colonial was roughly 1:3 and had a coincidental relationship to the companies' respective sizes and performances for the latest year.

CBA's net profit was 3.1 times that of Colonial's, earnings a share were 3.3 times higher and the share price the day before the announcement was 3.65 times that of Colonial's, although the latter's price had jumped on expectations a merger would eventuate, while the former's declined.

The coincidence was hardly remarkable, given the proposed merger was friendly and both companies would have assessed an appropriate offer for Colonial shareholders.

Assuming the merger is finalised, after shareholder and regulatory approval, the question is, what next?

There were stories out of Australia on Friday that AMP had turned down an offer from National Australia Bank reported to be worth more than $A20 billion.

National Mutual seems to be growing well on its own account, but, for the really big-time and in the wake of the Colonial/CBA deal, it could see sense in being allied with an Australian bank, subject to the global strategy of its French parent Axa.

Then we come to New Zealand's homegrown Tower. The company has grown rapidly since its switch from Government Life in 1990 and recent demutualisation but it is a big pond out there.

Tower probably benefited from its relatively small size when it set out on the growth path but the stage could be reached when internal growth was insufficient to compete globally against the international fish. The company's total assets at September 30 last year were $NZ5.9 billion, less than 10% - in $NZ terms - than Colonial's $A54.42 billion.

Small, or relatively small, may be beautiful, but the global financial system prefers muscle to curves.

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