UPDATE: Commonwealth Bank Rethinks Trusts Amid New Global Rules

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 [e-mail]

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