Australian mortgage services provider Commonwealth Bank of Australia (CBA.AX) announced late Tuesday that it has agreed to acquire Bank of Western Australia Ltd or BankWest and its wealth and insurance businesses, St Andrew's Australia Pty Ltd or St Andrew's, from its UK parent, HBOS plc (HBOS.L). HBOS would receive a total consideration of about A$2.1 billion in cash. The deal is expected to close by end-January 2009.
The acquisition is expected to be funded by $2 billion raised through accelerated institutional equity placement that would maintain Tier 1 capital at 7.6% as per the Australian regulatory requirements and Tier 1 capital at 10.1% under U.K.'s regulatory requirement.
The proposed acquisition is expected to be accretive to Commonwealth Bank's earnings per share immediately on its closure. The transaction would be completed pursuant to receipt of approval from the Australian government and the corporate regulator. However, the deal is not conditional to shareholder approval. Commonwealth Bank is determined to continue to carry substantial surplus capital, due to the current volatile market conditions.
In a statement, chief executive officer of Commonwealth Bank, Ralph Norris said, "The strength of our current capital and funding position combined with the strategic value of this transaction makes this an attractive opportunity for the Group and its shareholders. BankWest provides a significant opportunity to further develop the Group's business in the fast growing Western Australian market."
HBOS's wholly owned Australian subsidiary, HBOS Australia, would retain its other units in Australia, BOS International (Australia) Ltd., as well as its asset finance company, Capital Finance Australia Ltd. Both these units contribute substantial profits to HBOS Australia's operations. Bank of Scotland Treasury Australia, HBOS' Australian Treasury operation, would also be retained.
Last month, Edinburgh-based HBOS agreed to be bought over by British bank Lloyds TSB Group Plc. (LYG,LLOY.L) for 12.2 billion pounds, or US$22 billion in a deal brokered by the U.K. government. The acquisition is expected to be completed by the end of 2008 or early 2009. HBOS was formed in 2001 through the merger of mortgage lender Halifax Plc and Bank of Scotland.
HBOS, the sixth largest bank and biggest mortgage lender in the U.K, is currently facing a tough time hurt by a shortage of funds to back its mortgages. Selling BankWest and St Andrew's will strengthen HBOS' capital position and reduce its funding obligations amid the global credit crisis.
Buying BankWest would help Commonwealth Bank to get a clear market lead in BankWest's fast growing home state of Western Australia, and increase its overall share of the Australian market. Commonwealth Bank's dominant position in Australian mortgage lending business is in threat from Westpac Banking Corp., which is poised to move into the first place with the agreed takeover of St. George Bank Ltd.
Commonwealth Bank will be bringing together two iconic Australian financial services organizations through the acquisition of West Bank and HBOS Australia's wealth management business, St. Andrew's. The combined group will be Australia's largest financial services organization with close to 1,600 branches, 11 million customers and over 44,600 staff.
According to Commonwealth Bank, the combined businesses will strengthen its position as Australia's leading home lender with a market share of 22.5% and $187 billion of funds under administration. The combined entity would also have the country's largest share of household deposits with a market share of 33.6%.
In a letter to customers and colleagues, Norris stated that Commonwealth Bank is one of only 20 banks in the world with a Standard & Poor's AA credit rating. Standard & Poor's, Moody's and Fitch have all confirmed the Group's credit rating with a stable outlook, post the acquisition.
Pursuant to the acquisition, Commonwealth Bank and BankWest branches and business centers in Western Australia will continue to operate under the respective brand names. The overlapping branches would be integrated with a view to incorporating best practices and enhancing customer experiences across the group. However, the St. Andrew's units operations would be integrated into the group's existing wealth management business.
HBOS Australia chief executive David Willis said, "We expect there will be very little change for customers and they will be able to continue accessing BankWest and St Andrew's products and services as usual. We will work with Commonwealth Bank to ensure the transition is as smooth as possible."
Credit Suisse has served as exclusive financial adviser to Commonwealth Bank on this transaction.
Further, Commonwealth Bank confirmed to have been in high-level exploratory discussions with insurance and banking group Suncorp-Metway last week, to acquire its banking and wealth management operations.
In August, Commonwealth Bank reported half-year net profit after tax on statutory basis of A$2.42 billion and net profit after tax on cash basis of A$2.35 billion. The half-yearly Net interest income was A$4.01 billion and total banking income was A$5.78 billion. The company also reported total operating income for the half-year period of A$7.38 billion.
However, HBOS Plc reported in July a 72% plunge in its first-half profit, hurt mainly by writedowns of 1.1 billion pounds on credit investments. The company's first-half pre-tax profit dropped to 848 million pounds. Half-yearly profit attributable to shareholders came in at GBP 931 million or 23.5 pence per share, a sharp decline from GBP 2.11 billion or 54.6 pence per share in the previous year.
Shares of Commonwealth Bank of Australia are under a two-day trading halt on account of equity placement to help fund the acquisition. CBA.AX closed Tuesday's regular trading session on the Australian Securities exchange at A$45.15, up A$2.35 on a volume of 3.78 million shares. In the past 52-week period, the stock has been trading in a range of A$37.02 to A$62.16.
HBOS.L closed Tuesday's regular trading session on the LSE at 94.00 pence, down 66.80 pence or 41.54% on a volume of 42.76 million shares. In the past 52-week period, the stock has been trading in a range of 88.00 pence to 966.00 pence.
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