Was Commonwealth Bank of Australia's (CBA) decision to offload its life insurance business a smart strategic move? Yes, according to one expert.
Writing in
The Australian, David Walker, a large-caps portfolio manager at Clime Asset Management, stated that CBA’s decision is “one of the better strategic decisions the bank has made, and there should be more of it.”
“CBA’s reasons for selling its life books to
AIA are valid,” Walker said. “Only underwriters with global scale, diversification and risk management systems will earn adequate returns in the future. CBA is better off as a distributor, hence the 20-year marketing deal with
AIA.”
According to Walker, CBA’s exit from life insurance will also be politically useful. This will allow the bank to push back against further inquiries or a royal commission and say it is s no longer involved in the design of policies and the payment of claims that had been so much trouble in the past, he said.
“Although the sale reduces earnings, it could increase earnings per share if CBA more than offsets this by reducing shares on issue. The bank will soon need to let the market into its thinking on capital management to ensure consensus expectations are valid.
“Other factors in the mix are any class action settlement, higher regulatory, compliance and legal costs, bad debts expense and likely ongoing high technology costs,” Walker said.
Following the CBA-AIA deal, the intrinsic valuation for the stock, which includes the capitalised value of franking credits, is $82. CBA, attractive around $73, is trading at about $76, he said.
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