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Westpac is set to become Australasia's largest bank after unveiling a proposal to merge with smaller rival St George in a A$63 billion ($77.2 billion) tie-up.
Westpac, with a market capitalisation of A$49 billion, and St George with a market cap of about A$14 billion, said yesterday they were in negotiations over an all-scrip merger proposal.
If completed the deal will create Australasia's largest bank, eclipsing ASB Bank parent Commonwealth Bank of Australia which has a market value of about A$58 billion.
Westpac is currently Australasia's third-largest bank.
While Australia's four major banks are prevented from merging or taking over each other by the Four Pillars policy - which also limits foreign ownership of these strategic assets - Sydney-based St George, the country's fifth biggest is not constrained by the policy.
However KPMG's Andrew Dinsdale noted this was the first significant banking sector transaction since Australian Prime Minister Kevin Rudd's Labor Government came to power.
"It will be interesting to see how the Australian Competition and Consumer Commission sees it," he said.
The transaction will also require the approval of the Australian Prudential Regulatory Authority and Treasurer Wayne Swan.
"It appears there wouldn't be any regulatory issues here in New Zealand," said Dinsdale.
St George's only New Zealand business, the Superbank joint venture with supermarket co-operative Foodstuffs, closed down in August 2006 after just three years with its $500 million mortgage book sold to GE Money and deposits either transferred to Kiwibank or repaid.
The merger talks have come at a time when St George, with an A- credit rating, below that of the major four's AA ratings, is being hit particularly hard by the increasing cost of funds on international markets.
Earlier in the month, it had to pay more than 10 times the margin it paid a year ago for a debt issue.
However, it is understood the merged entity is likely to retain Westpac's AA rating.
"It makes a lot of sense. St George is about a third of the size of Westpac and the cost synergies they can extract out of St George would be staggering," said Peter Vann, head of investment research at Constellation Capital Management.
"They will be paying a premium over St George's closing price, there's no doubt about that. Ten or 20 per cent, it depends how the offer comes through."
Should the merger proceed, it is likely to be aided by the fact that current Westpac chief executive Gail Kelly was until August last year St George's chief executive and knows the business well.
Westpac said it planned to keep the St George brands and branch networks.
"Westpac believes the respective brands would be better able to compete and flourish by belonging to the same larger, stronger, entity," the bank said.
St George said the talks followed an approach by Westpac after the market close on May 9, just days after St George disappointed markets after it trimmed its earnings target for the year due to higher funding costs.
St George said it expected to make a further announcement before trading began this morning.
Westpac earlier this month posted a 10 per cent rise in first-half core profit, driven by growth in consumer and business lending, but also warned it expected lending growth to slow.
A counter offer to Westpac's proposal from one of the other bank majors is believed possible.
Bank of New Zealand parent National Australia Bank held a strategic stake in St George before offloading it in the wake of its 2004 foreign exchange losses, and could look again.
