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Banks must be kept in check

By Evan Jones

Where is competition when we need it?

The government should reject Westpac's bid to takeover St George, argues Evan Jones.

Last February, Gail Kelly, long-time chief executive of St George Bank, became chief executive of Westpac. In May, Westpac launched a takeover bid for St George, highlighting that this brazen move had been long in the planning. The financial media thrive on takeovers but public interest is typically absent from the calculus. For the finance media as for Westpac itself, this takeover is a done deal.

Surprisingly, in August the Australian Competition and Consumer Commission approved the takeover by Australia's third largest full-service bank of Australia's fifth largest. The ACCC has apparently interpreted the bipartisan "four pillars" policy to mean not merely that there will be not fewer but that there will be no more than four major banks. As a jaundiced colleague quipped, these days the ACCC would approve the merger of heaven and hell on the basis that purgatory provides competitive tension.

The ACCC's "public competition assessment" is embarrassingly shallow, though it claims to have conducted a "comprehensive review". The ACCC condones Westpac's acquisition of market share through financial muscle which it couldn't achieve directly by satisfying customer needs.

The most troublesome segment is the small- and-medium-enterprise market. Typically for financial regulators, the SME market is lumped in with the "retail market" category, obscuring its peculiarity. The assessment does distinguish the estimated market shares for personal banking and for SME facilities both for St George and for the merged entity. The report also acknowledges, but then ignores, the "relationship driven" nature of SME and agribusiness banking. Adequate potential competition is envisaged for an ill-defined generic retail banking market.

The SME market is profits fodder for the four big banks, the product of a deeply unbalanced relationship. The bank wants profits with minimal input; the SME firm wants competence, commitment and integrity. The bank meets few or none of the firm's expectations. Consider two pertinent examples.

One. Sam Mason (a pseudonym) is a Sydney-based wholesale importer-cum-exporter generating an annual turnover of $5 million. His major bank lender (not Westpac) was gouging him on non-contractual fees. He moved to St George in 2006, hearing that his accountant's other clients had been doing likewise. The assessment concludes, "The ACCC does not consider that there is sufficient evidence to demonstrate that St George has been a uniquely vigorous and effective competitor in any of the retail banking markets, at least to the extent that would be required to show that the removal of St George as an independent player would be likely to lead to a substantial lessening of competition."

The ACCC wasn't looking. The finance newsletter The Sheet reported in May that the pre-tax earnings of St George's institutional and business banking division were fast overtaking the bank's traditional core retail earnings. The average deal of the IBB division (then reported at $6 million) is growing, along with the bank's customer base. St George's SME customers are in turn more loyal than are SME customers of the big four. The Sam Masons are multiplying.

Two. Craig Harwood and his father ran a successful game-meat-processing export-oriented company in Queensland, a recipient of many business awards. In 2002 the company planned expansion with the purchase and proposed re-fit of a west Brisbane factory. The cost was partly met by a sizeable federal government grant because of its potential to generate employment.

The Harwoods sought the necessary extra funding from their long-time banker, Westpac, with an offer from another major bank in hand. Westpac agreed to a loan of comparable quantum, albeit with less satisfactory facilities that the lending manager defended as providing more flexibility at lower cost. Harwood set to work on the expansion but the promised Westpac facilities never materialised. Instead the company account was sent to the bank's asset management (aka bad debt) unit and the Harwoods were informed that their business was not wanted.

By late 2004 Harwood was forced to hire a receiver-manager and put the company into voluntary administration. He was assured by Westpac of agreement to a positive vote for debt restructuring at a forthcoming creditor's meeting. But at the meeting Harwood's receiver-manager switched allegiance to the bank (a not unfamiliar occurrence) which voted to put the company into liquidation. The very next day, the company was sold at millions under value to a larger competitor, with better offers ignored. A first-rate entrepreneurial company was destroyed, taking government funds with it.

An observer could conclude that Westpac's actions (and those of the receiver) constitute unconscionable conduct pure and simple. Currently, Westpac is possibly the least regular offender of the big four, but this action represents unconscionability against SME borrowers. The ACCC knows about this racket because its files contain complaints from the victims. Ditto the Australian Securities and Investments Commission, which is responsible for monitoring financial services unconscionability. Both regulators decline to act on these complaints. The Treasury is complicit in the inaction.

Given that regulatory redress of unconscionable conduct against SMEs is non-existent, the ACCC could have compensated by rejecting this takeover that will reinforce the bulk of the SME market in the hands of the big four. The Big Four don't deserve this precious market, but they retain it by gobbling up the alternatives. The other big three have taken the ACCC approval as a green light: the CBA has now scooped up BankWest (expansion in the east will cease) and is preying on Suncorp-Metway's banking business. This disastrous outcome is apparently what the ACCC means by competition.

The takeover proposal is now on the desk of the Treasurer, Wayne Swan. Swan should exercise an independence of mind and reject this quintessentially anti-competitive takeover in a domain of enormous public significance.


Evan Jones is an Honorary Associate in Political Economy at the University of Sydney. This article was first published in the Canberra Times, and is reproduced with the kind permission of the author.


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