SYDNEY Commonwealth Bank (CBA.AX) agreed to buy struggling British bank HBOS's HBOS.L Australian unit BankWest and other assets for a cheap A$2.1 billion ($1.5 billion), to boost its market share in fast-growing Western Australia.
The cash deal by Australia's second-largest bank by assets comes a day after HBOS's shares slid 42 percent on Tuesday, leading a broad based sell-off in UK banks, as the UK government prepared to announce a rescue package for its crippled financial sector.
"It's certainly an attractive price, indicating some distress and willingness to sell. CBA's definitely got an attractive deal," said Mark Nathan, a portfolio manager at Fortis Investment Partners.
Like many other lenders around the world hit by the global credit crisis, British banks are scrambling to raise funds to shore up ailing balance sheets. HBOS has accepted a British government-backed takeover bid from rival Lloyds TSB Group Plc (LLOY.L).
CBA's purchase of BankWest, at 20 percent below book value, looks cheap compared to fellow Australian Westpac Banking Corp's (WBC.AX) takeover of St George Bank SGB.AX at 2.7 times book value for A$16.1 billion.
The acquisition also includes HBOS's life insurance and wealth management business in Australia, St Andrews, but not any other HBOS' operations in the country.
Consolidation in Australia's banking sector has been widely expected as its big four players bulk up to weather the financial market turmoil.
The acquisition of BankWest would boost CBA's earnings per share immediately, and create annual pre-tax cost synergies estimated to be at 20-25 percent of BankWest's cost base, CBA said.
SUNCORP IN PLAY
CBA also said it had had exploratory talks with Suncorp-Metway Ltd (SUN.AX), which operates the country's sixth-biggest bank, adding it was currently not involved in a sale process.
"We're now in a process of looking at our options in regard to the Suncorp process. We'll see what pans out over the next few days," CBA chief executive Ralph Norris said.
CBA played down concerns over the risk of taking on Suncorp as well, saying BankWest would operate on a subsidiary basis and therefore would not tie CBA down in an integration process.
Suncorp said on Monday it had received several approaches for its banking and wealth management businesses, which analysts reckon could fetch up to A$5 billion.
CBA has been tipped as a front runner to buy the assets and analysts believe it can still afford it even after the BankWest deal.
"We think so. They're raising funds for this (for BankWest), so they still maintain a very strong Tier 1 ratio and capital position. They remain well placed to consider a Suncorp opportunity," Macquarie analyst Ben Zucker said.
Banking sources said CBA planned to raise A$2 billion through an issue of new ordinary shares to help fund the BankWest deal, with an offer price seen between A$38 and A$43 per share.
CBA's purchase of BankWest, expected to be completed by end January 2009, did not require HBOS or CBA shareholder approval, but would need regulatory approvals.
Trading in CBA's shares was halted pending the completion of the capital raising, expected by late Wednesday. They last traded at A$45.15, having fallen about 24 percent so far this year in a broader sell-off in bank shares due to the global credit crisis.
Westpac, Australia's fourth-biggest bank, is close to acquiring No. 5 bank St George in Australia's biggest banking takeover.
After CBA's acquisition of BankWest, Norris said the combined group would be larger than a combined Westpac and St. George by several measures, but it would be a close race.
BankWest has 860,000 customers, mostly in Western Australia state which has been growing fast on the back of a mining boom. It has also been expanding its retail banking operations in the more populous eastern Australian markets.
BankWest's net profit grew 5.7 percent in 2007 to A$204 million, and its total assets as of June were A$59.8 billion. CBA was advised by Credit Suisse, while HBOS was advised by Morgan Stanley.
(Additional reporting by Sonali Paul)
(Editing by James Thornhill and Anshuman Daga)