Think Twice Finance

As One Storm Ends, Another Comes: The Australian Merger Melee

It was semi-prophetic the way that the big four Aussie banks announced to the world months ago their robust and healthy capital positions, leaving them well placed to secure the smaller, struggling financials when the sub-prime turmoil ended.

I began to wonder soon after, however, whether this was nothing more than a stalling tactic while they continued to dig through the web of accounts and subsidiaries attached to their bottom line, especially since no acquisitions came. But then, finally someone had the guts to do it. Thank you Gail Kelly (former St George and current Westpac CEO).

Yesterday, a trading halt was placed on the shares of Westpac (Australia’s 3^rd largest financial), and St George Bank (Australia’s 5^th), whilst the terms of the merger were finalised. The combined entity will form Australia’s leading financial services provider with a market cap. of $66bn vs. former number 1, the CBA’s, $60bn. Further scrutiny of the details of the merger are irrelevant for the sake of this article, what matters is that it happened.

So what does this mean for the other members of Australia’s big four? Ironically, I think there are four likely paths the banks may take, depending on which side of the four pillar’s debate you take, and your beliefs in what makes a bank successful.

Firstly, the remaining members of Australia’s big four banks, CBA, NAB, and ANZ, follow suit, cleaning up the Regional banks, and perhaps looking to Asia for acquisitions as seems to be the current trend. Westpac has already struck a significant blow in acquiring St George, knowing that four pillar’s policy prevented a merger between the big four it did the next best thing. Not only that, but as the senior party to the merger, it can continue to exercise its own beliefs on the strategic direction of the group. The only remaining financials in the Australian market of any significance include Suncorp-Metway, Bank of Queensland, Adelaide Bank, and Bendigo Bank, and I’m not sure they offer a great deal more to the likes of CBA, NAB, and ANZ. Still, if size matters, you could not rule out a takeover bid, and indeed the market hasn’t, pricing all four of the said regional’s at about 5% above yesterdays close.

Second, the banks go their separate ways. Whilst the Westpac / St George merge is certainly significant, it hardly offers any new sources of income. It provides economies of scale with regards to the Australian and New Zealand markets and will no doubt enable it to capitalise on a number of synergies that exist between the two banks, but in terms of diversity it does very little. It could be that the bank that chooses to differentiate itself the most, in the smartest way, will ultimately go the furthest. Speculation of the NAB acquiring ABN AMRO Morgan’s brokering arm in Australia, and/or the Australian investment banking division of CitiGroup could prove to be a winner in the medium-long term.

Thirdly, the four pillar’s policy debate reignites. There still exists the threat of foreign financial juggernauts such as HBOS, through Bank West, capturing a dominant market-share, especially in the retail banking space where it offers ultra-competitive deposit rates, up to100bp above the norm. What if they were to secure such a portion of market-share in any of the most lucrative Aussie banking markets in the years ahead? The big four would have no choice but to unite, or die a slow and painful death. One interesting take on this subject is that the two Sydney based banks in CBA and Westpac could join forces, and the two Melbourne based giants NAB and ANZ do likewise, assuming four pillar’s legislation is scraped. Seems logical, but I wonder how the CBA would react to such a proposal, having been the number one Sydney bank until about 24 hours ago. I doubt it would be so accommodating towards Westpac’s proposal to ‘merge’ as St George.

Finally, nothing happens. Why should one change in the financial landscape necessarily lead to another? After all, it’s not the size of the balance sheet, it’s how you use it. Take a look at Macquarie, a quarter the size of CBA (in terms of market cap.), albeit far more specialised, but still, more profitable. And the CBA itself is dwarfed in comparison to Bank of America or CitiGroup, but still, percentage wise, it has been more profitable. Some people just don’t get that if Jo Blo invested $1 million dollars ten years ago in little Macquarie, and Jimmy Smits invested the same in the mighty Bear Stearns, Jo Blo would be sitting on a beach somewhere, sipping ice-tea with a little beach umbrella in it, worrying about nothing more than the spread of his tan, and Jimmy Smits would be curled up in the fetal position somewhere cold.

In the end, that’s all that matters, which bank can generate the most value for its shareholders. But even so, the takeover winds are blowing hard here in Oz, and we’ll just have to wait and see who’s standing when they pass.