By Ross Kelly
SYDNEY--Australia's biggest bank moved to raise cash by selling
management rights to property trusts worth a combined 9 billion
Australian dollars (US$8.4 billion), signaling the growing pressure
lenders are under to comply with new global capital rules.
Commonwealth Bank of Australia Ltd. (CBA.AU), the country's
largest lender by market value, said it had offered to the trusts
themselves the management rights to Commonwealth Property Office
Fund (CPA.AU), CFS Retail Property Trust Group (CFX.AU), and New
Zealand-listed Kiwi Income Property Trust (KIP.NZ).
If taken up, the offers--known as internalization deals--would
mark another milestone in the demise of a business model pioneered
in the country by Macquarie Group Ltd. (MGX.AU), where banks create
listed funds from which they regularly collect management and
performance fees.
Few other Australian banks have taken the path of externally
managing listed trusts, which account for only a fraction of
Commonwealth Bank's annual earnings.
"Rising requirements for capital adequacy will have the banks
going through their balance sheets looking for assets that require
high amounts of capital but don't deliver high rates of return,"
said Angus Gluskie, Sydney-based managing director of White Funds
Management, which owns Commonwealth Bank shares.
Under the international Basel III agreement, reached among
regulators following the global financial crisis, banks are
required to ensure their balance sheets are adequately protected
from unseen economic shocks. The rules demand even more of a
capital buffer when lenders have listed equity investments, such as
trusts linked to property and infrastructure.
Therefore, if Commonwealth Bank also chooses to sell its
minority stakes in the real-estate trusts, it may accrue a double
benefit--strengthening its balance sheet while lowering the
regulatory burden because it would no longer own any part of the
trusts.
A sale of the management rights alone in all three trusts may
help the lender raise hundreds of millions of dollars, according to
analysts who follow the stock. But it may also come at a cost.
Managers of property and infrastructure funds often generate
lucrative income streams from their fees.
The biggest real-estate trust of the three, CFS Retail, paid
basic and performance fees to Commonwealth Bank that added up to
A$48.8 million in the year to June 30, according to its annual
report.
On the other hand, the shares of many listed funds of this type
in Australia have performed poorly since the financial crisis,
sparking anger among some investors over the size of the fees paid
to managers. The backlash has prompted some, including Macquarie,
to gradually offload their management rights.
CFS Retail's stapled securities are roughly unchanged from a
year ago, while those of Commonwealth Property Office are up only
about 4%. Australia's benchmark stock index is more than 20%
higher.
Commonwealth Bank itself didn't say why it had decided to sell
its management rights to the funds, and a spokeswoman for the
lender declined to comment on the size of any of the offers.
In a note to clients last month, J.P. Morgan analyst Richard
Jones estimated the rights to the three trusts could sell for as
much as A$650 million. That compares with Commonwealth Bank's
market value of almost A$120 billion, and its last annual net
profit of slightly above A$7 billion.
"The deciding factor would be improving their own balance
sheet," said White Funds' Mr. Gluskie.
-Gillian Tan contributed to this article
Write to Ross Kelly at ross.kelly@wsj.com
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