Westpac Banking (WBC) News Update

Westpac Banking Corporation (WBC) has a price target of $25.90 from Australian stock analyst UBS.

Westpac Banking Corporation (WBC) SGB MIA - "a growth agenda"

No surprises in the WBC/SGB Merger Implementation Agreement (MIA):

WBC & SGB today released its MIA following two weeks of due diligence. Key Points: (1) Pre-tax cost synergies of 20-25% of SGB's cost base are expected - we assumed 24%. (2) WBC expect revenue benefits & funding to exceed customer attrition by Year 2 - we expect 1% net attrition by Year 3 (3) Implementation date 21 Nov. (4) SGB & WBC both pay final dividends separately. (5) "No shop, no talk" clause means SGB can not solicit bids and can only open its data room once a formal bid is received. (6) $700m integration costs larger than expected.

Key Financials post merger:

We have completed financial modelling and peer benchmarking for the combined Group (ref schedules within). Key Ratios: EPS -2.1% (FY09E), -0.5% (FY10E), +0.2% FY11E. ROE falls to 14%. ROA stable at 0.92%. CTI falls from 40.7% FY09E to 37% in FY11E. Merged WBC trading on 2% FY11 sector PE premium.

CBA & NAB still most likely counter-bidders. WBC remains well placed:

We estimate a counter-bidder for SGB would need a c35% premium to SGB's pre-bid price to woo its Board (WBC original bid 29%). At current prices CBA would need 45% net synergies to be accretive. NAB has blown-out to 63% (ex-div price). Given recent price falls a cash alternative counter-bid may now be required.

Valuation - Maintain Buy, Price Target $25.90 (DCF, SOTP, Int'l Peers)

WBC has slipped to a 2% sector premium post its bid. The proposed SGB merger could enable it to address its Retail banking shortfalls (customer centricity, transaction & deposit gathering), deliver scale benefits & dominate distribution.