When the iconic Campbell Inquiry into the finance sector delivered its report in 1981, it promised a utopian environment for customers by getting rid of regulatory distortions and unleashing the free spirit of competition.
Curiously, the Committee didn't bother to explain what it meant by "competition". Even the experts now disagree on what competition means and how to achieve it. But never mind. The official silence has facilitated a political coup of the first order: the populist masses think it means one thing, but the establishment knows it means something else.
Most people think that competition translates to "the more banks, the better". The establishment thinks that competition means the survival of the fittest - or, more accurately, the survival of the most powerful. Enter the Westpac takeover of St George. Anti-competitive from one perspective, pro-competitive from the other. Brilliant!
This reduction of choice was already in train while the Campbell Report was still warm. In 1981, the Melbourne-based National Bank acquired the Commercial Banking Company of Sydney, while the Bank of New South Wales (later Westpac) acquired the Melbourne-based Commercial Bank of Australia. The then ANZ Bank had been three separate banks a decade previously. These acquisitions occurred with the blessing of the Reserve Bank, which preferred fewer banks for ease of attempted influence through what was then known as "moral suasion". Thus when the Hawke-Keating Government was elected in 1983, it inherited a landscape in which a mere four banks dominated.
In 1985, Treasurer Keating issued 16 licences for foreign-owned bank entry into Australia. The entrants were sizeable entities, but all found entry into retail banking hampered by the expenses of duplicating the extensive branch network that characterises trading bank operations in Australia.
This, combined with other factors, meant that by 1990, the big four still held two-thirds of deposit-taking institutional assets in Australia. And what did they do with this dominant position? They pissed it against the wall. Journalist Trevor Sykes estimated that, to mid-1993, the big four had written off $16.3 billion in bad debts out of a sector total of $28.5 billion.
The only phenomenon countering the big four was the survival of building societies and the conversion of many of these into trading banks. But the clout of this second tier has been weakened by the plundering of its ranks - in particular, Westpac's acquisition of Western Australia's Challenge Bank in 1995 and the Bank of Melbourne in 1997. St George itself grew by acquiring its rival Advance Bank in 1997.
In the words of the unloved Karl Marx, we are witnessing the inevitable concentration and centralisation of capital - or as the finance media would put it, the necessary consolidation and rationalisation of an overbanked economy.
And so to the current takeover bid, the culmination of a decade of longing by myriad big players to acquire this crucial vehicle to build market share overnight. St George made itself seemingly invulnerable, but the credit crunch has exposed the bank's greater dependence on asset securitisation than the big four, with their larger retail deposit base. Moreover, St George has a lower credit rating, which increases capital raising costs.
Thus, say the pundits, St George is struggling and is a warranted takeover prospect.
What tosh. St George made $514 million net profit in the half year to March. It's down, yes, but down off a record profit the previous year. Moreover, return on equity is down but remains at over 20 per cent, compared to 15 per cent for the ANZ and 16.5 per cent for the NAB. So what's the problem?
A particularly unsavoury aspect is that the push is led by Westpac Chair, Ted Evans, former Secretary of the Treasury.
The fate of the takeover lies heavily in the hands of the Australian Competition and Consumer Commission technocrats, but they too have been scratching their collective noggin over what competition is supposed to look like. The ACCC's February draft merger guidelines, to replace guidelines a decade old, indicate that they're on the case. The 70-page document also highlights that the process of discerning public interest against a ravenous private sector is not straightforward.
However, recent deliberations and public pronouncements suggest the ACCC heavies lean towards the establishment mentality. The previous Chairman, Allan Fels, suffered perennial character assassination for questioning the takeover orgy, but his replacement, Graeme Samuel - himself from the big end of town - has proved more docile on the merger front: witness the nodding complicity in retail giants Woolworths and Coles's endless gobbling up of their small rivals. The ACCC's condoning of the Challenge Bank and Bank of Melbourne takeovers (under Fels) has created a dangerous precedent.
There are some positive elements in the draft guidelines. Sections 4.10 and 6.18 read, respectively: "While some firms may be relatively small in terms of size and market share, they may nevertheless have a significant influence on the competitiveness of the market. Mergers involving such firms may result in unilateral effects by impeding or removing significant aspects of competition, such as innovation or product development."
And: "The degree of increase in market concentration resulting from a horizontal merger may not necessarily be indicative of the degree of unilateral market power accruing to the merged firm. For example, a merger may involve only a small increase in concentration and yet a large increase in market power if it involves the removal of a maverick firm, which, despite its size, provides competitive tension to the entire market."
St George is not quite a "maverick", but it (and its peers) is a lynchpin in banking competition. Abstract notions of competition fail to confront the specifics of the financial services sector. "Products", once developed, are more readily duplicated. Price differentials are less significant than the character of ongoing customer relations and, behind that, the integrity of the institution itself.
On the latter, the big four get thumbs down. St George and Bendigo Bank have consistently polled better than the big four on customer satisfaction. A previous St George employee, Con Nats, recently highlighted that customer relations were even better when St George was a building society and how these have been downgraded under pressure from market listing imperatives. Nats also emphasises the key role of the second tier former building society banks in product innovation.
More significantly, St George has recently been engineering a transformation of its character, from housing lending dependence into business banking. This transformation would undergird an elevated status in the top tier were the bank to remain independent.
The finance newsletter The Sheet reported in May that St George's Institutional and Business Banking division's pre-tax earnings had reached 78 per cent of the bank's retail division's pre-tax earnings, and was fast overtaking the latter. The average deal size of the IBB division (currently $6 million) is growing with the bank's customers. The bank's customers are in turn more loyal to the bank than their comparators are to the big four.
The small and medium enterprise (SME) market is a crucial earner in the Australian banking sector, with higher per dollar returns compensating for higher per unit administrative costs. The big four have long held around 80 per cent of the SME market, but borrower dissatisfaction has not led to a dramatic exodus because of the perceived costs of shifting - and the belief that the banks are all as bad as each other. But the second tier is now eating away at the undeserved big four dominance.
Indeed, the big four's treatment of their SME constituency has verged on the scandalous. The arena is pervaded by bank staff incompetence and indifference, and even malpractice, generally a result of head office pressures. The extent of unconscionable conduct is underappreciated because its coverage is anathema to a cowardly press.
In this respect, Westpac has kept a low profile recently, compared to the other big banks. However, there are still complaints outstanding from the foreign currency loans fiasco of the 1980s, in which Westpac was a major culprit.
In short, the evidence indicates that the absorption of St George points to bad news for customers. Westpac wants to acquire through muscle the customer it hasn't been able to attract through its offerings.
A takeover of St George will result in a mad scramble for the rest of the second tier. Bendigo Bank (and its half-subsidiary Elders Rural) and the Bank of Queensland will go. Their loss will not be readily offset by the slow inroads of HBOS-owned Bank West, ING and Rabobank.
Holding back this takeover is in the hands of the vacillating ACCC and the new Treasurer, Wayne Swan. Their decision will have a much longer lasting impact on the Australian economy than anything that comes out of last week's budget package.
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