Lloyds' Australian assets give Westpac room to grow

SYDNEY/LONDON Fri Oct 11, 2013 11:42am BST

Westpac Banking Corp Chief Executive Officer Gail Kelly smiles as she arrives for a media conference in Sydney May 3, 2013. REUTERS/David Gray

Westpac Banking Corp Chief Executive Officer Gail Kelly smiles as she arrives for a media conference in Sydney May 3, 2013.

Credit: Reuters/David Gray

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SYDNEY/LONDON (Reuters) - Westpac Banking Corp's A$1.45 billion ($1.4 billion) deal to buy Lloyds Banking Group's Australian assets illustrates the hard road Australian lenders have to travel to achieve meaningful growth in their own backyard.

Sluggish economic growth is only part of the problem, as regulatory curbs prohibit the four big lenders which control 80 percent of Australia's banking assets from merging with each other.

For foreign banks, Lloyds' sale is part of a wider trend of Western financial institutions retreating from Asia to focus on their home markets. European and U.S. banks have also been shedding non-core Asian operations to bolster their balance sheets to comply with new Basel III capital rules.

Lloyds, 33 percent owned by the British government, is selling its international businesses to satisfy lawmakers who want it to focus on lending to British companies and households. The bank expects to be operating in less than 10 countries by the end of next year, down from 30 in 2011.

The bank is also looking to bolster its capital and plug an 8.6 billion pound ($13.7 billion) shortfall identified by Britain's banking regulator in June.

Lloyds inherited the Australian business through its disastrous acquisition of rival HBOS in 2008, which precipitated its 20.5 billion pound government bailout.

"Australia was probably the worse example of 'adverse asset selection' in the entire ill-fated HBOS International debacle, generating cumulative losses of over 3 billion pounds despite Australia's generally resilient performance," said Investec analyst Ian Gordon.

Shares in Lloyds were up 1.3 percent at 0950 GMT.

Analysts said Lloyds will make a gain on the disposal of about 20 million pounds and the sale will improve its core Tier 1 capital ratio by about 20 basis points.

Analyst Mike Trippitt at brokerage Numis said the sale would add to the prospects of Lloyds' starting to pay dividends again next year for the first time since its bailout.

Australia's competition regulator is assessing the deal given Westpac's power in the domestic market, although the bank and an independent analyst said there should be no objections.

"We're confident that the transaction doesn't lessen competition substantially," a Westpac spokesman said.

CREDIT GROWTH

The widely anticipated deal, Westpac's largest acquisition since its 2008 takeover of St George Bank, will give Australia's oldest bank reach in motor vehicle finance, equipment finance and corporate lending, in addition to home mortgages.

Its shares closed up 2.5 percent at A$32.99, outperforming the benchmark S&P/ASX 200 index which was 1.6 percent higher.

"When overall credit growth is slow I think anything like this, which is also EPS accretive, would be considered a good deal," said Bell Potter analyst T.S. Lim, referring to Westpac's expectations the deal would benefit earnings per share in full-year 2014.

While not a huge purchase for Westpac, the Lloyds sale was viewed as an opportunity to pick up assets on the cheap at a time when the British firm is refocusing on its home operations.

Westpac will acquire Capital Finance Australia Ltd, an asset finance business, and BOS International Australia Ltd, a corporate loan portfolio. The corporate loan book, motor and equipment financing businesses have a face value of A$8.4 billion, the Australian bank said.

Morningstar analyst David Ellis described the deal as a "very sensible deployment of capital" which would not put Westpac's return on equity of more than 16 percent under pressure.

Even so, the transaction does not loom large in terms of future earnings, underscoring how tough it is for Australian banks to make high-impact acquisitions in a highly competitive and tightly controlled domestic market.

Two years out, the Lloyds transaction is likely to boost Westpac's earnings per share by about 1.3 percent, CLSA analyst Brian Johnson said. "Westpac's a big bank, this is a small acquisition," he added.

With the sale of most of its remaining Australian assets, Lloyds becomes the latest Western financial institution to retreat from the Asia-Pacific region following the 2008 global financial crisis.

French bank Societe Generale is selling its Asian private bank, while ING has sold most of its Asian insurance unit and is also exploring the sale of its banking operations in the region.

(Additional reporting by Jane Wardell and Denny Thomas; Editing by Stephen Coates)

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