Westpac Banking (WBC) Update

Submitted by Jim Thesiger on 14 May, 2008 - 14:38

Westpac Banking (WBC) has a $25.90 share price target from Australian stock analyst Macquarie Research Equities.

Answering the $64bn question: 1 SGB = 1.31 WBC

Westpac Banking (WBC)/St George Bank (SGB) confirm terms: implies $33.10 p/SGB share ex 88cps div:

Key details: (1) WBC has a 2 wk exclusivity arrangement (2) EPS accretive in Yr3, although no synergies stated (3) key brands, branches and ATMs maintained (4) ACCC, APRA and Treasurer approval required (5) subject to no higher offer and independent expert report findings.

EPS accretion in Yr3 requires c20% of target cost base savings:

WBC indicated expected revenue impact to be positive (i.e. synergies rather than attrition). Cost synergies to achieve an EPS neutral outcome in Yr 3 (FY11E) are ~$186m post-tax or 17% of SGB's forecast operating cost base. Further advantages in funding costs and capital relief from potential Basel 2 RWA reduction for SGB are identified but unquantified opportunities.

ANZ's NBNZ acquisition affords a reasonable comparison:

Given WBC's stated intention to maintain multiple brands, implying benefits from integrating operations, we consider ANZ's NBNZ acquisition a good comparison. We note ANZ: (1) suffered from heightened market competition (2) integrated back office while maintaining front line points of presence (3) experienced declining mkt share in mortgages, highlighting the risk to such complex acquistions (we est. combined WBC/SGB mortgage share post-merger of c25%).

Valuation: $25.90 Price Target (DCF, SOTP, Int'l Peers)

WBC is trading at 12.1x FY09E. SGB closed at $33.37, implying 1.32x WBC.