Westpac eyes growth not divs

As auctions go, it has been long and slow.

After Macquarie (MQG) dropped out of the race, the Lloyds Bank Australian loan portfolio was Westpac's (WBC) for the taking and this morning it shelled out $1.45 billion for the prize.

The biggest acquisition since its $18 billion grab for St George Bank during the depths of the financial crisis, the Lloyds loan book – commercial, corporate and car leasing – is expected to deliver around $100 million in net earnings to Westpac as early as next year.

There are two important observations to be made about the purchase. The first is that Macquarie, now firmly in the annuities and leasing business, has a much more disciplined approach when it comes to acquisitions.

Westpac paid slightly above book value. Macquarie, having dragged itself back from the brink of disaster in the wake of its ill-fated plunge into infrastructure a decade ago, clearly is no longer prepared to expand at any cost.

The second is that Westpac, mindful of the paucity of domestic expansion opportunities in Australian banking, had both the determination and, more importantly, the ammunition to win.

After delivering a special dividend in the first half, Westpac boss Gail Kelly now appears to have decided to invest excess capital for future growth.

For the purchase price is not the only cost to Westpac. The $8 billion loan book is comprised of higher risk car leasing, commercial loans and finance to small and medium enterprises

The heightened risk means the bank will need to assign more capital as a cushion for potential impairments under the more stringent banking rules since the Global Financial Crisis.

Westpac, however, appears to have cast aside gloomy predictions of a downturn in the domestic economy and clearly sees upside in the long dormant east coast as the Australian dollar eases over the medium term and breathes life back into the services and manufacturing sectors (see John Abernethy's Projecting value on four growth stocks).