Monday, May 12, 2008

St George Bank should not become part of Westpac

The ACCC should object to the proposed takeover by Westpac of the St George Bank on the grounds that it will reduce competition. My guess however is that Treasurer Swan will have already given indications that the merger be permitted.

There would be some cost-savings generated by the merger because branches could be closed and moderate network externalities realised. But these businesses are already large so that the gains in terms of having lower cost access to capital markets would be very modest.

The main effects will be however to reduce the very limited competition Australians have with respect to choice of banking service. The 'big four' banks offer lousy, expensive service and yet yield bloated profits to their shareholders on the basis of their preexisting market power. Service will be marginally worse not better should this takeover proceed because there will be still less competition.

Why can't the banks come up with innovative market ideas and improved service to extract better returns for their shareholders? Or are the only strategies open to the financial geniuses in the big four banks those involving takeovers of smaller Australian banks or dud investments overseas?

5 comments:

Spiros said...

"My guess however is that Treasurer Swan will have already given indications that the merger be permitted."

On what basis? Everything the government has done so far in competition policy has been pro-competition.

In any case, it's up to the ACCC, not the Treasurer.

Anonymous said...

If the ACCC didn't know about this then it is unlikely Swan would.

I doubt if Swan will go against the ACCC in this.
One would hope the ACCC would rule against this.

the Bank of Melbourne certainly does not compete in the way it did before it was taken over by Westpac.

It is surely ironic that Kelly can make this bid because of her silly strategy at St George ie fast growth, greater risk-taking in loans, greater reliance on wholesale funding etc

Anonymous said...

I have only just read today's AFR.

If their journalist is correct then Mr Swan had no idea of this at all!

Spiros said...

Harry, you might like to fix the typo in the heading.

On reflection Swan might veto the merger, as his his right under the Banking Act. The government has made a big deal out of people switching from one lender to another. If there's one less lender, that makes the switch a little bit harder.

derrida derider said...

Yep, this has gotta be a no-brainer for the ACCC - no possible good for consumers can come of it. And if they don't can it, Swan will - Labour Treasurers have never been friends to the big banks.

The only (unlikely) caveat on this is if St George is secretly in deep trouble and the merger is actually a rescue. This aside, it's such a sure thing that the merger will not happen that I can't see how the geniuses at Westpac ever thought it would. And those mug punters bidding up St George's stock aren't thinking it through either.