Westpac has shelled out $1.45 billion to buy Lloyds Banking Group's Australian assets, its biggest acquisition since takeover of St George Bank five years ago.
The agreement with Lloyds will see Westpac acquire 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 growing deposits among the fastest of the major banks. The transactions also means 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-size business customers. Many loans are tied up in equipment financing linked to mining, construction and transport industries.
It also gives Westpac 28 additional big corporate customers, which bankers regard as among the most lucrative.
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.
"These are businesses that we know well ... and we are very comfortable that the risk profile of these portfolios matching the risk profile of the existing Westpac Group," Mr Coffey said.
Westpac won the auction after 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 the British domestic market.
Westpac said the transaction was expected to add $100 million to cash earnings in financial year 2015. The purchase included about $1.19 billion of net tangible assets and $260 million in goodwill.
The bank expected pre-tax integration costs of about $130 million and pre-tax savings of $70 million a year.
The deal was not subject to regulatory approval, but the Australian Competition and Consumer Commission said it would review the acquisition.