CBA to buy Standard Chartered?

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Last night FTAlphaville speculated on a truly remarkable possibility. The cross post is below:

As fantasy banking M&A goes — this isn’t such an outlandish idea, we reckon.

But see what you think:

Following their strong share price performance in 2012, an obvious question arises as to how the Australian major banks can use their premium valuation, particularly given a subdued growth outlook.

While attractive acquisition opportunities are scarce, following STAN’s recent derating it is increasingly becoming a viable target for the majors. While we attach a low probability to any of the majors bidding for STAN (given the size and complexity of transaction), we believe it shouldn’t be completely ruled out, particularly if the valuation gap widens further.

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While we accept that the structure of this transaction is likely to be complex and STAN shareholders will demand a solid premium, it appears as though the majors’ current premium valuation could be enough to make the transaction work.

That’s from Nomura banking analysts Victor German, Anthony Hoo, Prue Rydstrand and Matthew Dunger. They’ve got a point.

The premium which Nomura place on Standard Chartered’s shares in a fantasy takeover — up to 37 per cent: punchy — tells you this is about the Aussie banks setting all that highly-rated paper to work. Stanchart, for all its Asian assets, is trading at a 15 per cent discount to the Australian big four.

Update: Oops, we missed this… the Australian Financial Review recently mentionedCommonwealth Bank (which Nomura’s figures suggest might be most able to wear the dilution of a bid) as a possible contender for Stanchart.

So why do we think there’s something to this?

Well firstly, it’s the funding (charts via Nomura, click to enlarge):

You can see why Stanchart’s $360bn of customer deposits might attract banks keen to cut offshore wholesale funding, or who want to avoid paying up to compete for deposits at home. We’re thinking of the regulatory turn against wholesale funding here…

But mostly there’s a very ‘use it or lose it’ feel to the whole thing.

The penny’s starting to drop that these banks’ home market may well be on the brink of a slowdown. Somewhere off stage, there’s the mess unfolding in China, though who knows how bad that’s going to get. Those multiples might not be around much longer.

Nomura write that any acquirer of Stanchart “is likely to underperform peers throughout the integration process which may take 3-5 years”.

But for that chance to expand beyond the home market.. (charts via Nomura)

It’d be a pretty radical change to the Australian bank lending model, to be sure.

No shit! You have to ask yourself what regulators would make of it, given they’ve said no big risks for Asian expansion are acceptable for Australian banks. Having said that, you can imagine the kind of pressure that would come to bear on APRA from all quarters if this deal became real. It would be enormous.

Finally, I’m skeptical. This is an example of precisely the kind of out-of-the-box deal that gets speculated upon at the very top of a cycle. Still, fascinating.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.