Westpac withdraws from sale

By PAULA OLIVER

Westpac yesterday became the second of Australia's big banks to pull out of the running to buy the National Bank.

It is understood that after taking a close look at the National Bank's books it became clear to Westpac that the numbers did not stack up in favour of merging the country's largest and second-largest banks.

In a statement to the Australian stock exchange, Westpac said it had chosen not to proceed any further in the sale process because a purchase would be diverting away from its "core organic growth strategy".

It would withdraw its application to the Commerce Commission for clearance to buy the bank.

Westpac's departure did not come as a surprise to many industry observers.

It had been perceived as an unlikely buyer because of its sheer size - it is almost the same size as the National Bank and the two are considerably larger than any of their competitors.

The Commerce Commission would have been a significant hurdle for such a deal.

It had also been suggested that Westpac simply wanted to take the rare opportunity to get a look at its competitor's books and gain valuable market intelligence.

The withdrawal left ANZ as the only confirmed bidder for the bank.

Global giant HSBC has been rumoured to be involved and a local group calling itself Black Horse Holdings Consortium has claimed it will secure finance for a bid.

Commonwealth Bank of Australia pulled out last month and the National Bank of Australia has yet to declare its hand.

The question of whether the sale could now extract sufficient price pressure was on the lips of Australian analysts yesterday.

They were divided on whether a float of the National Bank was now more likely because potential buyers were falling away.

Wilson HTM analyst Andrew Hills said that he suspected the major Australian banks had decided that a better way to buy a stake in the National Bank was through a float.

Others said that Lloyds TSB might not want to go ahead with a float because it would not achieve a price as high as it could through a trade sale.

Westpac's withdrawal has emphasised the hurdles in the way of an Australian bank intending to buy the National Bank.

A theory that had gained momentum among seasoned banking industry observers before Westpac pulled out yesterday was that the Australian banks were close to tossing the project into the "too hard" basket.

The theory was partly rooted in the Reserve Bank's stronger public stance in its role as supervisor.

The central bank had expressed concern about the risks of having all New Zealand's key banks Australian-owned.

In particular it was worried about whether a local bank could be run as a stand alone business if its overseas parent hit trouble.

The two major areas of concern were:

* The potential for an overseas owner to consolidate "back office" functions such as payments-clearing and IT in its home country.

* The need for the National Bank's business to remain locally incorporated.

These two concerns promised to be big hurdles for the only two suitors who had declared their hands - ANZ and Westpac.

In a time of stress, any consolidation of "back office" operations overseas would make it harder for a New Zealand arm to be run as a separate business.

A statutory manager, for example, may not have legal authority over the operations.

ANZ has been said to have a structure that is not totally independent of its Australian arm.

Incorporation would have been a bigger hurdle for Westpac.

The Reserve Bank wants banks with significant local deposits to be incorporated here because that makes it easier to manage the failure of an important bank.

All of the major Australian banks operating here are locally incorporated - except for Westpac.

It has its own act of Parliament which protects local depositors.

Westpac has been reluctant to incorporate because it feels that its unique act of Parliament satisfies all of the Reserve Bank's concerns.

But that isn't the only reason.

Incorporation would be costly - it is not as simple as strolling to the Companies Office and filling in a form.

Tax hurdles could inflate the cost to as high as $140 million.

Some banking industry observers think that the new hurdles put in place by the Reserve Bank may be the final straw for an Australian buyer.

That is because getting a purchase past the Commerce Commission is also unlikely to be simple.

ANZ admitted in its application that it would break "safe harbour" guidelines in most banking markets if it went ahead.

National Australia Bank would also face problems with market share, particularly in rural banking.

And the final fly in the ointment for an Australian purchase of the National Bank is the ongoing question mark over the future of AMP.

The financial services giant has been in trouble and NAB is said to be lining up for a takeover.

Instinct suggests that ANZ won't let go of the opportunity to buy the National Bank very easily.

But there is a lot of time left on the clock in this game and there could yet be an upset.