Is the Westpac move on St George Bank the bailout we had to have as a result of the subprime crisis and credit crunch? Although it’s a reasonable question, you’d have to say “no” because unlike banks in the US, Europe and the UK, Australian banks are well capitalised and earning real money.
The first the regulators knew of the situation was this morning when Westpac told them what was going on. So there was no behind the scenes “encouragement” for the deal, which is always an indicator of official concern in troubled times.
Of all the major banks, St George has been on the worry list of many in the markets and among investors because of its high dependence on securitising its mortgage loans to raise new capital. The securitisation market has been shut since the start of the year by the credit crunch and barely functioned in the last quarter of 2007.
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Its recent half year accounts show a sharp drop (over $3 billion or almost 30% in the amount of securitised assets it was holding). It had, though, been very successful in attracting new retail and business deposits and raising funds from the markets.
St George has had higher costs than Westpac for years because of its different business model: it has successfully grown its Asgard wealth management business and has managed to rationalise and drive deeper into small and medium business lending on the Eastern seaboard and in South Australia.
In its statement Westpac said today that it “believes the respective brands would be better able to compete and flourish by belonging to the same larger, stronger, entity. Both organisations are strong businesses, with iconic brands, strong and highly complementary cultures and long track records of delivering for customers, employees, shareholders and the community.”
Westpac made similar noises when it took over Challenge Bank in Western Australia and Bank of Melbourne in Victoria. Westpac’s overall market share in both markets rose, and then fell as customers went elsewhere. Westpac effectively destroyed the value of both deals over time because people didn’t want to continue banking with them.
Savings for Westpac come from rationalising St George branches, staff, back offices, and call centres. The two banks have more than 1,200 branches and 2,700 ATMs. Westpac said it saw no need to cut those, and yet if there is a downturn in business in the next one or two years, that promise will come under pressure.