Lloyds move makes sense: Kelly
The agreement with Lloyds will result in Westpac acquiring the British bank's asset finance business CFAL and its corporate loan portfolio BOSI.
The deal comprises the motor vehicle finance book of $3.9 billion, equipment finance book of $2.9 billion and a corporate loan portfolio of $1.6 billion, which together give the loan portfolio a face value of $8.4 billion.
For Westpac, the move marks the biggest acquisition since it paid $18.5 billion for St George Bank in 2008. For Lloyds - still part owned by the British government - the move marks a long expected exit from the Australian market.
Unlike a traditional banking acquisition, the buyout does not come with a branch network or vast banking infrastructure. The deal largely represents the transfer of a loans book between the banks. However there will be the transfer of 800 Lloyds staff to Westpac with some job losses expected.
The acquisition means Westpac now has an additional $8 billion in largely commercial loans to fund, placing pressure on its funding model at a time when regulators are pushing banks to fund more of their loans from deposits. However Westpac has been increasing deposits among the fastest of the major banks.
The transactions also mean Westpac must set aside more capital to act as a buffer for the loans that have more risk attached to them than housing loans. Westpac shares closed 2.45 per cent higher at $32.99 on Friday.
"This is a value creating, straightforward transaction that makes both commercial and strategic sense," Westpac chief executive Gail Kelly said. "These are strongly performing businesses that we know well and that will expand our reach and capability in target segment."
In moving on the lending book Westpac argues the deal gives it 62,000 additional small to mid-sized business customers. Much of these loans are tied up in equipment financing linked to mining, construction and transport.
It also gives Westpac 28 additional big corporate customers, which are regarded among the most lucrative among bankers.
Nomura banking analyst Victor German said the transaction was likely to be broadly neutral for earnings and did not alter his outlook for the bank.
"As an alternative, they could have returned [their surplus capital] to shareholders, which could also be a reasonably good way of deploying capital. But they chose this option and I don't really see a problem with that," Mr German said.
Westpac's chief financial officer Phil Coffey said he did not believe the bank was taking on more risk, pointing out that Lloyds' entire portfolio represented less than 2 per cent of Westpac's loans.
Westpac won the auction after rivals Macquarie Group and a consortium led by Pepper Australia and GE Capital dropped out of the race.
The sale was part of Lloyds' global strategy to cut back on its international network as it focuses on Britain's domestic market.
Westpac said the transaction was expected to add $100 million to cash earnings in financial year 2015.
Frequently Asked Questions about this Article…
Westpac bought Lloyds Banking Group's Australian asset finance business (CFAL) and corporate loan portfolio (BOSI) for about $1.45 billion, marking its biggest acquisition since the St George takeover.
The deal transferred a loans book with a face value of about $8.4 billion, including a $3.9 billion motor vehicle finance book, a $2.9 billion equipment finance book and a $1.6 billion corporate loan portfolio.
The additional roughly $8 billion of mainly commercial loans will put pressure on Westpac’s funding model because regulators want banks to fund more lending from deposits. Westpac will also need to set aside more capital as a buffer because these loans are generally riskier than housing loans.
Westpac’s CFO Phil Coffey said the portfolio represents less than 2% of Westpac’s total loans, and Nomura analyst Victor German described the transaction as broadly neutral for earnings. However, the loans are more commercial and higher‑risk than mortgages, so Westpac must hold more capital against them.
Westpac said the transaction is expected to add about $100 million to cash earnings in the 2015 financial year. Market reaction was positive on the announcement, with Westpac shares closing about 2.45% higher at $32.99 the same day.
Westpac expects to gain about 62,000 additional small to mid-sized business customers and 28 additional large corporate customers. Around 800 Lloyds staff will transfer to Westpac, though some job losses are expected.
The sale is part of Lloyds Banking Group’s global strategy to cut back its international network and focus on Britain’s domestic market; the bank is still partly owned by the British government.
Rivals including Macquarie Group and a consortium led by Pepper Australia and GE Capital were in the running but dropped out. Westpac won the auction and described the purchase as a value‑creating, straightforward transaction that expands its capabilities in target segments.
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