Lloyds' Australian assets give Westpac room to grow

Reuters

* Australian competition regulator to assess deal

* Big banks in Australia face obstacles to acquisitions

* Lloyds selling off international businesses to focus on UK

* Westpac shares close 2.5 pct higher, Lloyds up 1.3 pct

By Jackie Range and Matt Scuffham

SYDNEY/LONDON, Oct 11 (Reuters) - Westpac Banking Corp's A$1.45 billion ($1.4 billion) deal to buy LloydsBanking Group's Australian assets illustrates the hardroad Australian lenders have to travel to achieve meaningfulgrowth in their own backyard.

Sluggish economic growth is only part of the problem, asregulatory curbs prohibit the four big lenders which control 80percent of Australia's banking assets from merging with eachother.

For foreign banks, Lloyds' sale is part of a wider trend ofWestern financial institutions retreating from Asia to focus ontheir home markets. European and U.S. banks have also beenshedding non-core Asian operations to bolster their balancesheets to comply with new Basel III capital rules.

Lloyds, 33 percent owned by the British government, isselling its international businesses to satisfy lawmakers whowant it to focus on lending to British companies and households.The bank expects to be operating in less than 10 countries bythe end of next year, down from 30 in 2011.

The bank is also looking to bolster its capital and plug an8.6 billion pound ($13.7 billion) shortfall identified byBritain's banking regulator in June.

Lloyds inherited the Australian business through itsdisastrous acquisition of rival HBOS in 2008, which precipitatedits 20.5 billion pound government bailout.

"Australia was probably the worst example of 'adverse assetselection' in the entire ill-fated HBOS International debacle,generating cumulative losses of over 3 billion pounds despiteAustralia's generally resilient performance," said Investecanalyst Ian Gordon.

Shares in Lloyds were up 1.3 percent at 0950 GMT.

Analysts said Lloyds will make a gain on the disposal ofabout 20 million pounds and the sale will improve its core Tier1 capital ratio by about 20 basis points.

Analyst Mike Trippitt at brokerage Numis said the sale wouldadd to the prospects of Lloyds' starting to pay dividends againnext year for the first time since its bailout.

Australia's competition regulator is assessing the deal given Westpac's power in the domestic market, although the bankand an independent analyst said there should be no objections.

"We're confident that the transaction doesn't lessencompetition substantially," a Westpac spokesman said.

CREDIT GROWTH

The widely anticipated deal, Westpac's largest acquisitionsince its 2008 takeover of St George Bank, will give Australia'soldest bank reach in motor vehicle finance, equipment financeand corporate lending, in addition to home mortgages.

Its shares closed up 2.5 percent at A$32.99, outperformingthe benchmark S&P/ASX 200 index which was 1.6 percent higher.

"When overall credit growth is slow I think anything likethis, which is also EPS accretive, would be considered a gooddeal," said Bell Potter analyst T.S. Lim, referring to Westpac'sexpectations the deal would benefit earnings per share infull-year 2014.

While not a huge purchase for Westpac, the Lloyds sale wasviewed as an opportunity to pick up assets on the cheap at atime when the British firm is refocusing on its home operations.

Westpac will acquire Capital Finance Australia Ltd, an assetfinance business, and BOS International Australia Ltd, acorporate loan portfolio. The corporate loan book, motor andequipment financing businesses have a face value of A$8.4billion, the Australian bank said.

Morningstar analyst David Ellis described the deal as a"very sensible deployment of capital" which would not putWestpac's return on equity of more than 16 percent underpressure.

Even so, the transaction does not loom large in terms offuture earnings, underscoring how tough it is for Australianbanks to make high-impact acquisitions in a highly competitiveand tightly controlled domestic market.

Two years out, the Lloyds transaction is likely to boostWestpac's earnings per share by about 1.3 percent, CLSA analystBrian Johnson said. "Westpac's a big bank, this is a smallacquisition," he added.

With the sale of most of its remaining Australian assets,Lloyds becomes the latest Western financial institution toretreat from the Asia-Pacific region following the 2008 globalfinancial crisis.

French bank Societe Generale is selling its Asianprivate bank, while ING has sold most of its Asianinsurance unit and is also exploring the sale of its bankingoperations in the region.

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