CBA deals itself back in
The Commonwealth Bank's opportunistic purchase of BankWest may allow it to hang onto its mantle as Australia's largest bank. But a large equity raising needed to complete the transaction won't be without difficulty.
Commonwealth Bank's Ralph Norris couldn't have chosen a better moment to buy a regional bank from a distressed UK parent. Unfortunately, he also couldn't have picked a much worse time to go to the equity markets to fund the purchase.
The deal itself is a steal. CBA will acquire BankWest from HBOS for no more than $2.1 billion, or 80 per cent of its book value. That makes it the cheapest bank acquisition done in this market in living memory.
Westpac has offered 2.7 times book for St George. The going rate for a bank has generally been around twice book value and more than 16 times earnings. CBA has paid just over 11 times earnings for BankWest and its insurance and wealth management business, St Andrew's.
These are, of course, unusual times and HBOS is under a lot of pressure. It is engaged in a forced merger with Lloyds TSB and therefore isn't in the best position to negotiate.
CBA has capitalised on that stress and made an acquisition that will be immediately accretive in terms of earnings-per-share and, because it is being made at a $620 million discount to BankWest's book value, will contribute to the funding of its own takeover by reducing the amount of new capital that would otherwise be required. The discount also provides some insurance against any gremlins lurking within the BankWest loan book that has been grown aggressively in recent years.
To offset the dilution of its capital ratios that would otherwise occur as CBA brings BankWest's $63 billion of assets onto its own balance sheet, Norris is raising $2 billion through an institutional placement. If successful, that would maintain CBA's tier one capital ratio at 7.6 per cent.
This isn't a good moment to raise $2 billion of equity, even for an institution as strong as CBA. The continuing turmoil in the US and Europe – particularly the renewed concerns about the fragility of the UK banking system – sent another wave of fear through the Australian market this morning.
Bank stocks have been hit particularly hard. Westpac was down about five per cent, ANZ closer to 5.5 per cent and NAB 7 per cent this morning.
Trading in CBA shares, which have risen from about $40 to more than $45 in the past few weeks, has been halted while the capital raising takes place but the institutions participating in the bookbuild will be only too aware of the renewed bout of concern about the stability of the global banking system and its implications for the value of the local banks.
That suggests that while CBA may be getting a bargain, in historical terms, by acquiring BankWest at a material discount to its book value the equity it raises to fund the deal is going to be quite expensive.
Strategically, the acquisition is a tremendous piece of opportunism by CBA. BankWest might be relatively small in the national context but it is large in Western Australia. Its acquisition will give CBA a dominant presence in one of the fastest growing markets in the country.
In that sense it is quite different to Westpac's acquisition of St George, which amplifies Westpac's exposure to the moribund NSW economy. For CBA, while BankWest is a fraction of St George's size, it provides diversification and growth, as well as more than $200 million a year of synergies.
BankWest is, at face value, a high-cost bank, with a cost-to-income ratio of almost 68 per cent, compared with CBA's 49 per cent. That ratio is, however, bloated by the cost of BankWest's major expansion of its physical presence on the east coast. CBA could shut that down if it wished.
What is appealing about BankWest in the present climate, apart from its home market, is that it is 63 per cent funded by retail deposits. CBA already has the best deposit base of the majors – customer deposits provide 58 per cent of its funding – and the acquisition will lift that marginally.
While scale isn't necessarily an on objective in itself, CBA will also be able to maintain its status as the largest bank within the domestic market after it completes the acquisition – a mantle that would otherwise have been taken from it by Westpac after its absorbs St George.
The deal itself is a steal. CBA will acquire BankWest from HBOS for no more than $2.1 billion, or 80 per cent of its book value. That makes it the cheapest bank acquisition done in this market in living memory.
Westpac has offered 2.7 times book for St George. The going rate for a bank has generally been around twice book value and more than 16 times earnings. CBA has paid just over 11 times earnings for BankWest and its insurance and wealth management business, St Andrew's.
These are, of course, unusual times and HBOS is under a lot of pressure. It is engaged in a forced merger with Lloyds TSB and therefore isn't in the best position to negotiate.
CBA has capitalised on that stress and made an acquisition that will be immediately accretive in terms of earnings-per-share and, because it is being made at a $620 million discount to BankWest's book value, will contribute to the funding of its own takeover by reducing the amount of new capital that would otherwise be required. The discount also provides some insurance against any gremlins lurking within the BankWest loan book that has been grown aggressively in recent years.
To offset the dilution of its capital ratios that would otherwise occur as CBA brings BankWest's $63 billion of assets onto its own balance sheet, Norris is raising $2 billion through an institutional placement. If successful, that would maintain CBA's tier one capital ratio at 7.6 per cent.
This isn't a good moment to raise $2 billion of equity, even for an institution as strong as CBA. The continuing turmoil in the US and Europe – particularly the renewed concerns about the fragility of the UK banking system – sent another wave of fear through the Australian market this morning.
Bank stocks have been hit particularly hard. Westpac was down about five per cent, ANZ closer to 5.5 per cent and NAB 7 per cent this morning.
Trading in CBA shares, which have risen from about $40 to more than $45 in the past few weeks, has been halted while the capital raising takes place but the institutions participating in the bookbuild will be only too aware of the renewed bout of concern about the stability of the global banking system and its implications for the value of the local banks.
That suggests that while CBA may be getting a bargain, in historical terms, by acquiring BankWest at a material discount to its book value the equity it raises to fund the deal is going to be quite expensive.
Strategically, the acquisition is a tremendous piece of opportunism by CBA. BankWest might be relatively small in the national context but it is large in Western Australia. Its acquisition will give CBA a dominant presence in one of the fastest growing markets in the country.
In that sense it is quite different to Westpac's acquisition of St George, which amplifies Westpac's exposure to the moribund NSW economy. For CBA, while BankWest is a fraction of St George's size, it provides diversification and growth, as well as more than $200 million a year of synergies.
BankWest is, at face value, a high-cost bank, with a cost-to-income ratio of almost 68 per cent, compared with CBA's 49 per cent. That ratio is, however, bloated by the cost of BankWest's major expansion of its physical presence on the east coast. CBA could shut that down if it wished.
What is appealing about BankWest in the present climate, apart from its home market, is that it is 63 per cent funded by retail deposits. CBA already has the best deposit base of the majors – customer deposits provide 58 per cent of its funding – and the acquisition will lift that marginally.
While scale isn't necessarily an on objective in itself, CBA will also be able to maintain its status as the largest bank within the domestic market after it completes the acquisition – a mantle that would otherwise have been taken from it by Westpac after its absorbs St George.
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