St George's handover to Westpac: good for business but bad news for competition

There's enough in the profit result Westpac handed down yesterday to confirm that last year's approval of the bank's $16 billion takeover of St George was good for Westpac, but bad for competition.

St George has higher exposure than Westpac to commercial property loans that are either impaired or threatening to become so. Loans to residential property developers in Western Australia and south-eastern Queensland seem to be particularly vulnerable.

In a year that covered the peak of the financial crisis, St George produced pro forma cash earnings of $1 billion, 23 per cent of Westpac's total profit. St George's core profit, which strips out the transient effect of bad debts, was up by 16 per cent to $2.09 billion, just short of 20 per cent of Westpac's $10.02 billion core surplus.

St George might not not have done quite so well as a stand-alone business. It has that higher property development exposure (business loan impairment charges for St George were up by $431 million in the year), and while it has a continuing presence at street level under Westpac's successful multi-bank brand strategy, it is accessing funds through Westpac and paying less than it would have on its own, with or without the government guarantee.

On the strength of yesterday's numbers, however, there's no doubt it would have survived with the government guarantee behind it, and the September half banking results and a steady unfreezing of the debt markets suggest that conditions are returning more quickly than expected to a point where smaller competitors can once again chase market share: Westpac's chief executive, Gail Kelly, followed ANZ yesterday in declaring that the bad debt cycle had peaked and, like the ANZ boss, Mike Smith, and NAB's Cameron Clyne, says she sees no serious signs that bad debts are spreading from the business world to individuals and households.

Impairment charges on credit cards and personal loans actually fell at Westpac in the September half.

But St George is no longer in a position to work in the coming upswing as a counter-balance to the big four, which have boosted their share of the mortgage market from 56.8 per cent to 73.8 per cent in two years and their share of bank deposits 58.8 per cent to 72.6 per cent in the same period, according to figures from CoreData. Westpac is successfully integrating St George as a member of its house of brands portfolio, which also includes Bank SA and the RAMS home loan franchise, but St George is owned lock, stock and barrel, and will behave itself.

Kelly says Westpac is all about giving customers choice, and says research shows there is very little overlap between the customer bases, but I will streak down a street of Westpac's choice if it ever reports that St George has won market share at its expense, and contrary to its wishes.

One of the highlights of Westpac's profit yesterday was that St George and Westpac have been increasing their market share. Westpac budgeted to lose about 4 per cent of St George's customers after the takeover, but it hasn't happened. The Australian Competition and Consumer Commission also thinks that separate branding for St George and Westpac should not be confused with separate competitive positions.

When it cleared the takeover last year, it noted that Westpac had announced plans to run St George as a distinct retail brand, but said common ownership would nevertheless ''remove the incentive for the two organisations to compete on price or on other aspects of the service offering''.

Its analysis assumed that St George would not be a competitor in a banking market it said was predominantly national. And its decision to approve the deal rested on two main pillars: the first was that St George's national market share in key markets was relatively small, ranging from 4 per cent for credit cards to 9 per cent for small business lending. The second was that there was sufficient competition from other sources.

That second pillar turned out to be structurally unsound in one crucial aspect, and with the benefit of hindsight the commission made its call at the wrong time, just before the collapse of Lehman Brothers elevated the financial crisis and shut down already stressed securitised debt markets.

As Kelly noted, competition is still strong. But it is now overwhelmingly between the big four banks; the other sources of competitive pressure that the ACCC relied on - foreign banks, regional banks, credit unions and building societies - have retreated.

In the mortgage market, the big four are writing about 90 per cent of the new business, and their overall market share is rising.

Could the ACCC have preserved St George for the greater good? It may have hung on whether banking really is a national market, and not a series of regional ones. If it is a national market, St George was too small to justify a ban.

But would consumers be better off if St George was independent? In my opinion, no doubt: how and why the rules delivered St George to Westpac and what needs to be done to prevent a repeat is something to consider.