An Aussie Bank That’s a Good Bet

06/23/2008 12:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says Australia’s Westpac is taking over another big Aussie bank, but it’s a conservative bank that pays a rich dividend.

Westpac Banking Corp. (NYSE:WBK) has reached agreement with St. George Bank Ltd. to acquire the company for an all-stock deal representing a 28.5% premium over St. George’s closing price prior to the announcement. St. George is Australia’s fifth-largest bank by market capitalization. Assuming shareholder and regulatory approval, both of which are likely, the new entity will be the largest bank on the island continent. 

I’m not a fan of big mergers: Bolt-on acquisitions to broaden a company’s product line or expand its market reach are fine, but there’s too much size-for-the-sake-of-size merging going on. That said, however, I’m okay with this one. Bank mergers, at least in America, have usually helped profitability, albeit at the expense of consumers, who’ve ended up paying much higher fees. It has only been the megamergers between allegedly related entities, like Citibank, Salomon Brothers, and Travelers, that have gone awry. All the “synergies” that were supposed to materialize never did, nor did the cost savings.

The thing I like best about this merger is that Westpac’s chief executive officer, Gail Kelly, used to be the CEO of St. George. She knows the people, the systems, and the operations inside out. Integration should be made easier by Kelly’s familiarity in all matters. Also, since Australian banks generally rely on foreign capital for much of their funding, Westpac’s strong balance sheet ought to lower the cost of capital for its acquiree.

WBK’s shares have come down [sharply] since November, [and] Westpac is now at its best price in months. The shares yield 5.3% at last year’s payout rate, and this year’s dividend looks on track to be noticeably higher. The company has grown dividends at 14.9% compounded for the last ten years, and share price at 19.4% compounded for the same period.

It is selling at ten times this year’s expected earnings, giving it a great bargain price/earnings-to-growth ratio of less than 0.8. Australia’s resource-based economy is well placed to benefit from the strong growth in China and India; so, it looks like there’s plenty of growth still ahead.

There are a few risks attached to the merger, but not big ones. St. George has recently taken an A$20 million provision on a loan related to troubled asset manager MFS Ltd. That liability could get larger. It also remains exposed to risky loans at Allco Finance Group Ltd., and mall developer Centro Properties Group. A spokeswoman said St. George hasn't taken charges against those loans because the borrowers have been able to meet the deadlines for debt repayment so far.

Westpac is a conservative way to put money in your pocket every year, yet still have great potential for above-average long-term growth. Westpac Banking Corp. is a buy up to $117. (It closed above $97 Friday—Editor.)

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