Beyond bread-and-butter banking

Westpac’s Lloyds portfolio buy isn’t the end of bank asset diversification – and the big four are in prime position to pick and choose.

Westpac’s acquisition of Lloyds’ Australian motor vehicle and equipment financing and corporate lending portfolio is a sign the big four banks must stray from traditional bread and butter banking activity to generate a more meaningful return on idle funds.

Fortunately the big four are in a position to snap up any unwanted assets from domestic and international peers. For regional banks and credit unions, capital requirements and cost of funding pressures mean acquisitions of a similar scale to Lloyds just aren’t a viable option. Of potential suitors, Westpac was in the best position to pay the highest price, $1.45 billion, compared with competitors Macquarie Group and Pepper Australia.  

The final acquisition price of the Lloyds’ portfolio is 40 per cent of the market capitalisation of the Bank of Queensland and 34 per cent of Bendigo Bank. It is simply not feasible for the regional banks to raise funds for these types of assets that would give investors a return commensurate with the risk to be assumed. Simply put, the cost of funding would consume too much of the return, leaving little for investors.

There are going to be more instances of banking-related assets for sale that will be out of reach of smaller market players, providing little opportunity to diversify in an appropriate risk-adjusted manner.

As it stands the big four can effectively pick and choose which assets they want, placing them in prime position to consider expanding from their core, traditional banking activities as they see fit. Over the years we have seen the banking industry merge with wealth management – a move that is becoming increasingly profitable for the big four. This is not to say asset financing will be the new norm, it is merely an option they can consider.

Both Westpac and the ANZ Bank have existing asset financing exposures, making these types of opportunities a strategic fit. It is unlikely National Australia Bank and Commonwealth Bank will be moving into asset financing anytime soon. Rather, Westpac’s acquisition is more reflective of the control the big four wield when it comes to getting what they want, providing it is approved by the watchdog.

The ultimate result of the dominance of the big four looks like a one-stop shop for all financial needs for the end user. In some circumstances it may not necessarily be beneficial for competition of the market, though as an investment option it is shaping up to be an entirely positive story.