Banks in the Asia-Pacific region have invested heavily in wealth management businesses over the past decade, having identified it as a key growth area. But a new report from Nomura’s Australian research team suggests that, in Australia at least, wealth management businesses contribute only a tiny proportion of group earnings.

While structurally Nomura believes the outlook for Australian wealth management is sound and attractive for banks, the businesses are not sizeable enough to make a material difference to bank earnings growth over the medium term, said analysts led by Victor German, in a recent report. 

The Japanese lender estimates that wealth businesses only constitute between five and ten per cent of group earnings at Australian banks.

Even though wealth earnings are growing up to 5 per cent more than banking earnings, overall this is likely to only improve the major banks’ earnings growth by between 0.2 per cent and 0.5 per cent, with the differential across individual banks ranging between 0.1 per cent and 0.2 per cent, said the bank.

“Our analysis highlights that wealth businesses do not have a material impact on the majors’ valuations, suggesting it is not the key source of valuation differences. We believe that only around 2 per cent of Commonwealth Bank of Australia’s valuation premium is explained by its larger wealth management business,” said Nomura.

Meanwhile mergers in the sector have not delivered expected returns and many banks have paid over the odds for acquisitions.

Nomura estimates the banks’ wealth business return on equity on an ungeared basis falls short of group ROE, suggesting that banks have not been able to justify the valuation premiums they paid for their wealth businesses over the past 12 years.

Prominent Australian wealth management M&A deals include Colonial’s merger with Commonwealth Bank of Australia in 2000, MLC’s merger with Aviva in 2009 and BT and Rothschild’s tie-up in 2002. On these three deals, the implied growth in wealth management earnings has been 6 per cent, 1 per cent and 8 per cent respectively.

“Although our analysis doesn’t fully capture the strategic rationale of the transactions, we estimate that targets delivered compound annual growth rate earnings growth of just 1-8 per cent per annum,” said Nomura.

The six major banks in Australian with wealth management businesses are ANZ, Commonwealth Bank, National Australia Bank, Westpac Banking Corp, Bank of Queensland and Bendigo & Adelaide Bank. Nomura has neutral ratings on all except National Australia Bank, which it rates "Buy".

Could wealth management ever become the Holy Grail for banks? Perhaps. While retail banking has dominated earnings growth over the past decade, in a more heavily regulated banking environment (where funding is an increasingly scarce commodity), wealth management could one day make a material difference, said the analysts.