HBOS Banking On Australia

Sydney, July 13, 2007 (ABN Newswire) - In reality it's a hard to understand the move by HBOS, Britain's biggest mortgage bank, and owner of BankWest in Perth, to spend hundreds of millions of dollars in building more than 160 branches across Australia to win more business from the rest of the local banking industry.

Bank of Western Australia Ltd., the Perth-based subsidiary of HBOS since 2003, will expand outside its home state through 125 retail and 35 commercial branches in NSW, Victoria, Queensland and South Australia over the next four years.

BankWest says it will extend opening hours to weekends and boost its workforce by 60 per cent to win more customers.

But the major banks, Westpac, CBA, ANZ, NAB and St George have all been moving down the same route for the past three years or more. In fact, the ANZ started this move back in 1999-2000 and is by far the most advanced, while St George has never deviated far from its folksy concentration on servicing customers.

Predictably, the panic merchants in the market saw this as bad news for Nab, down 45c to $39.80, ANZ, down 15c to $29.45, CBA, down 41 at $55.15, Westpac, off 28c at $26.05 and St George, down just 7c at $35.13.

In contrast, Bendigo Bank was up 18c at $15.49, Bank of Queensland up 23c at $16.66 and Adelaide bank rose 20c to $15.10. These three smaller regional banks were perhaps reacting to comments from HBOS executives that they could never rule out acquisitions.

Well not all executives, because the local bosses of BankWest made it clear they saw no future in buying a local bank.

HBOS says it's adding branches in Ireland and Australia to take advantage of increased profitability in some ofits overseas businesses.

BankWest has 86 retail branches in Western Australia and one in each of the cities of Sydney, Adelaide, Brisbane and Melbourne. It has 30 corporate-lending branches throughout the country. In contrast, the CBA has more than 1,000 branches and the National Australia Bank has around 800.

HBOS says BankWest's profitability has risen 66 per cent since it was bought 100 per cent back in 2003. That's well over $600 million.

The decision by HBOS to grow 'organically' in Australia should end the suggestion that a big foreign bank might swoop in on one of the big Australian banks and carry it off, thereby ending the four pillars policy.

Spending around $380 million or so is a much cheaper option than grabbing the ANZ and paying the best part of $55 billion or more. The existing big five Australian banks are now capitalised at levels that would price them out of most rational bank management plans around the world.

The regional banks, like Bendigo are too small and too local for a big outsider.

For example, Bendigo Bank has just fought off a semi-hostile bid from Bank of Queensland Ltd. A fully hostile offer, unless priced so high as to be an outright bribe, would have little chance of success.

HBOS with its foot in WA was probably one of the few foreign banks with a chance of moving into a bid here. Citibank is another, but has world-wide growth problems which are worrying management in New York, while HSBC is the third big foreigner with a significant local presence. It, however, seems to be focusing more on Asia and trying to sort out a $10 billion problem insubprime mortgages in the US.

HBOS has a price-earnings ratio of 9.8 times earnings compared with an average multiple of 15.4 times for Australia's eight big banks, making a takeover bid less attractive: in fact, very hard to do.

The first of the new branches will open in New South Wales in the fourth quarter of this year. About A$380 million will be spent on the expansion in 2007 and 2008.

What is interesting is that HBOS has found that the internet presence BankWest has been successfully using to pick up cheap deposits outside of Perth (cheap in terms of acquisition cost) is no longer the only way to go.

A more conventional bricks and mortar approach (very old fashioned) has been chosen, along with the extra burden of finding 3,000 bank-savvy employees, or finding 3,000 people and training them.

Why it hasn't tied itself up with Woolies, like it has with Tesco in the UK, is a mystery. That would have been a cheaper way of gaining business and market share.

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Here's how HBOS explained it on its UK website:

BankWest, part of the HBOS group, announces today it is launching the largest ever branch expansion programme undertaken in Australia – more than 160 branches on the East Coast of Australia over the next three to four years. HBOS is the largest UK financial institution currently operating in Australia.

The expansion programme involves opening more than 125 retail banking branches and 35 branches focused on business customers. The first branches will open later this year.

During 2007 and 2008, £160 million will be expensed on the project by HBOS Australia, BankWest's parent company. The investment encompasses the branch program and other related costs, such as IT infrastructure, as well as the development of the Group's insurance and investment business.

A Major Extension of BankWest's Reach

BankWest is the leading bank in Western Australia. Up until now, it has had a more modest presence on the East Coast of Australia.

Through the expansion programme, BankWest will reach more than 11 million potential new customers on the East Coast of Australia. Almost 80% of the Australian population live in the East Coast states of New South Wales, Victoria and Queensland. In addition, approximately 50% of the total population live in three Eastern cities: Sydney, Melbourne and Brisbane.

Focused International Expansion

The Australian retail banking expansion programme is a core part of the group's targeted international strategy. HBOS concentrates on countries like Ireland and Australia – economies with strong growth prospects and similar banking and regulatory systems to the UK. HBOS also has a large Europe and North America business providing retail banking, corporate banking and investment products to companies and individuals.

Australia is one of the world's major economies with a GDP of US$732.5bn – bigger, for instance, than Switzerland and Sweden combined (source: World Bank). Australia's economic prospects are strong; significant population growth is expected. The Australian Bureau of Statistics forecasts that the population could increase by one third from 20.6m now to 28.2m in 2050.

HBOS in Australia

HBOS and Bank of Scotland have been operating in Australia for approximately ten years. At the time of the merger between Bank of Scotland and Halifax in 2001, Bank of Scotland owned just over 50% of BankWest. Subsequently, in 2003, HBOS purchased the remaining minority stake in BankWest. HBOS Australia offers a full range of financial services – retail banking, commercial and corporate banking, insurance and investment, etc.

Profit growth at HBOS Australia has been very significant. Profits have increased by 66% from £168 million (2003) to £278 million (2006). At the same time, BankWest has been rapidly expanding its retail banking franchise on the East Coast. As a result, over the last two years, BankWest has been Australia's fastest growing retail bank, overtaking Suncorp in 2006 as the country's 6th biggest retail bank.

BankWest's growth has been driven by a sharp focus on innovative, value for money products, including Lite MasterCard, TeleNet direct deposit and Kid's Bonus Saver. Most recently, the BankWest More MasterCard was launched.

Attacking the Big Four

Value for money and customer convenience are at the centre of the BankWest retail banking strategy. Through the expansion programme announced today, BankWest will concentrate on winning customers from the National Australia Bank, Westpac, the Commonwealth Bank and ANZ. Between them, these four financial institutions typically have a relationship with about 70% of Australian customers.

Australian customers want change. A survey by Newspoll, commissioned by BankWest, found that better interest rates and convenience were the main reasons for Australians to switch from one bank to another. 69% of Australians regard better interest rates and more competitive products as being the main switching driver.

Australians are looking for an alternative to the Big Four. Nearly six in ten Australians surveyed by Newspoll said that if they were to switch banks tomorrow, they would move to a bank other than the Big Four.

Focused on the customer

The new BankWest branches will be located in major East Coast shopping centres, retail precincts or commercial districts. Through this expansion programme, BankWest will, for the first time, have access to more than 11 million potential new customers on the East Coast through a branch network.

Extended opening hours including weekends and innovative product offerings will be features of the new retail branches. BankWest is currently recruiting staff from a mix of banking and retail backgrounds.

The new look branches will be unveiled along with an expanded suite of market-leading customer friendly products when the roll-out commences in the last quarter of this year and will complement BankWest's well-established broker network and successful direct business.

The retail expansion programme will be led by newly appointed BankWest Retail Chief Executive Ian Corfield, who led a similar branch expansion for HBOS in Ireland. BankWest Commercial CEO Paul Clark is leading the business banking expansion.



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