Australian Banking Sector Update

Here is an Australian banking sector update from Australian market analyst UBS.

Labor Govt keeps the Four Pillars Policy

Rudd Government is committed to the four pillars policy:

Treasurer Wayne Swan announced "the Rudd Government will maintain the existing Four Pillars policy [preventing mergers between ANZ, CBA, NAB & WBC]... Australia is best served by a stable banking system that can continue to draw on the strength and risk management skills of four major banks, rather than a lesser number. Accordingly, whatever may be the outcome of the banking merger now under consideration, the Rudd Government sees no case for changing the Four Pillars policy which has served Australia well."

SGB, SUN, BankWest (HBOS), BEN & BOQ become more strategic assets:

Given Four Pillars is staying this makes the second tier banks more strategically attractive to the majors. Regional banks provide geographic diversification, distribution, deposit bases and scale/synergy opportunites.

A counterbid for SGB is now more likely, albeit dilutive:

We believe that the reiteration of the four pillars policy makes a counterbid for SGB (5th largest bank) more likely. However, following share price pull-backs a 35% premium bid by NAB would be -6.1% dilutive (using WBC's stated synergies) or would require it to take out 66% of SGB's costs to make it accretive.

Neutral Sector, some risk from upcoming US Broker results.:

Neutral the Banks at 10.7x FY09E. Positives: (1) "bad boy" work-outs underway, no new exposures, (2) systemic credit quality holding, (3) funding improving (4) asset repricing underway. Risks: (1) consumer stress, further cash rate increases, (2) credit growth slowing, (3) negative commentary from US Broker results.