Westpac Buys Lloyds Assets as Rules Encourage Asia Retreat

Westpac Banking Corp. agreed to buy Lloyds Banking Group Plc’s Australian assets as tighter capital rules following the 2008 financial crisis prompt European and U.S. lenders to retreat from the Asia-Pacific region.

The transaction valued at A$1.45 billion ($1.37 billion) includes an A$8.4 billion leasing and corporate loan portfolio, Sydney-based Westpac, Australia’s second-largest lender by market value, said today in a statement. Macquarie Group Ltd. and Pepper Australia Pty also made bids for the assets, according to people with knowledge of the offers.

The deal allows Westpac, prevented from merging with its three biggest rivals, to broaden a business dominated by mortgages. Lloyds, bailed out by the U.K. government in 2008, joins firms including Goldman Sachs Group Inc. that have raised more than $15 billion since 2012 by selling shares in Asian institutions as new banking regulations make it more expensive to hold minority stakes.

“Given capital implications, banks globally will be less willing to hold minority stakes as they think about returns,” said Mark Nathan, managing partner at Sydney-based Arnhem Investment Management, which manages about $3.8 billion. “In this deal, it was more of a bank-specific pressure to exit a market, which played into Westpac’s hands, given the low-growth environment.”

Today’s transaction is Westpac’s biggest acquisition since Chief Executive Officer Gail Kelly bought St. George Bank Ltd. for A$18.5 billion in 2008. Westpac shares closed 2.5 percent higher at A$32.99 in Sydney, their biggest advance since June 14. Lloyds closed at 76.02 pence in London, up 1.5 percent.

Cash Earnings

The assets are expected to add A$100 million to cash earnings by fiscal 2015, according to the statement. The purchase price includes about A$1.19 billion of net tangible assets and A$260 million in goodwill. Westpac expects pretax integration costs of A$130 million and pretax savings of A$70 million per year.

The acquisition is “closely aligned to Westpac’s small and medium enterprises and corporate target segments,” Standard & Poor’s said in a statement today. “Westpac will benefit from the synergies created through the acquisition in the future.”

Shareholder Benefit

Westpac will gain A$2.9 billion in equipment finance, A$3.9 billion in motor vehicle finance, A$1.6 billion in corporate loans and 28 corporate customers, it said. The transaction will reduce Westpac’s common equity tier 1 capital ratio by 38 basis points. The lender’s common equity tier 1 capital ratio stood at 8.7 percent as of March 31, according to filings on May 3.

“The transaction meets our strict acquisition criteria and shareholders will see a benefit to earnings per share” in the year to September 2014, Kelly said in a statement to the stock exchange. “Our strong capital position has allowed us to expand our business without having to raise additional equity.”

The deal isn’t subject to regulatory approvals and is expected to be completed on Dec. 31, according to the statement. Westpac has notified the Australian Competition & Consumer Commission of the transaction and is co-operating with its informal merger review process, the bank said.

“We believe the transaction doesn’t substantially reduce competition,” Westpac Chief Financial Officer Philip Coffey said on a conference call with analysts.

The regulator asked for comments on the acquisition from “interested parties” by Oct. 30, the ACCC said in a posting on its website. Goldman Sachs is advising Lloyds on the sale with Credit Suisse AG, people familiar with the process have said.

Country Exit

Kelly, who ran St. George before the Westpac takeover, agreed in May to pay a special dividend for the first time since 1988 after first-half cash earnings rose 10 percent. Westpac shares have risen 21 percent since she took over on Feb. 1, 2008, the second-best performance among the four biggest Australian lenders.

Lloyds, Britain’s biggest mortgage lender, is strengthening its balance sheet by selling assets and cutting costs following its 20 billion-pound ($32 billion) bailout in 2008. The British government started selling part of its stake in the bank last month as part of a move to full private ownership.

Lloyds International Pty, the London-based lender’s Australian unit, reported a loss of A$148.3 million in 2012, after a shortfall of A$1.2 billion the previous year, according to company filings. The division reduced assets by 24 percent to A$12.2 billion last year, the documents show.

“The sale will enable our country exit from Australia, which will be effected a short time after completion, although we will continue to support core U.K.-linked clients in Australia,” Lloyds said in a statement.

Global Rules

The transaction is expected to lead to a gain on disposal of about 20 million pounds, while the group will write down a related deferred tax asset of about 350 million pounds, Lloyds said. Fully-loaded common equity core tier 1 capital ratio is expected to increase by about 20 basis points as the sale reduces risk weighted assets, Lloyds said.

Some European and U.S. banks are selling their holdings of shares in Asian lenders as new rules set by the Basel Committee on Banking Supervision require capital deductions for holding minority investments in other financial institutions.

Bank of America Corp. sold its remaining shares in China Construction Bank Corp. for $1.5 billion in September. Goldman Sachs offloaded its final stake in Industrial & Commercial Bank of China Ltd. in May for $1.1 billion, capping a seven-year investment in the nation’s largest lender.

Citigroup sold its stake in Shanghai Pudong Development Bank in March 2012, nine years after buying it, for an after-tax gain of $349 million. In February, HSBC completed a $9.4 billion sale of shares in Ping An Insurance (Group) Co.

Outstanding Loans

U.S. regulators are also pushing for bigger cushions against potential losses, proposing in July that lenders’ leverage ratios, or capital as a percentage of total assets, be pegged at 5 percent for holding companies, 2 percentage points more than the international minimum.

Westpac, established in 1817 as the Bank of New South Wales, is Australia’s oldest lender. It had 1,273 branches across the country as of June 30, the Australian Prudential Regulatory Authority said Aug. 21.

Mortgages represented 69 percent of the lender’s outstanding loans in Australia as of March 31, according to a company filing. Business lending accounted for 27 percent.

Outstanding mortgages in Australia rose 4.7 percent in the year to Aug. 31 and business credit climbed 1.4 percent, according to central bank data. Housing loans advanced on average 10.8 percent annually over the past decade while business lending grew 7.5 percent, the data show.

Australia’s so-called four-pillar policy prevents the largest four lenders -- Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac -- from buying each other.