A couple of presentations I have sat through over the last couple of weeks have caused me to do a little bit of reflecting on where the banking industry has come over the last few years – and where it is likely to head.

Let’s start with what will not change. In the short to medium term at least, I cannot see the “4 pillars” structure changing. The big four banks – NAB, CBA, ANZ and WBC – will all still be there and I very much doubt they will be taken over by a foreign bank. This is partly because they are reasonably well rated on the ASX, but mainly because the foreign banks know the reaction would not be, shall we say, entirely favourable. Internationally, the Aussie banks are quite small, so size would not be a problem if they did come into play. Citibank, for example, could swallow the NAB without really noticing the effect on the balance sheet.  I just cannot see it happening.

Mid Tier

The really interesting area on the mergers and acquisitions front is the regionals – St. George, Suncorp / Metway, Bank of Queensland, Adelaide Bank and Bank of South Australia. These guys are vulnerable to takeover. The problem is that, for the most part, their share prices already reflect that. St. George is under a bit of pressure due to its high reliance on the slowing NSW economy, but it is highly rated due to its good performance. Suncorp, with the addition of that lovely little surprise in the Promina deal, is probably safe for a year or two while that is sorted out, but, if the merger does not work, look to WBC or perhaps St. George making a move there. They would both gain from some exposure to a “sunbelt” state.

The others are all vulnerable – their small(ish) size means that capital relief through the use of the advanced methodologies under Basel II is not really possible at this stage – a “big daddy” coming in would therefore enhance their enterprise value through capital relief – paying for a part of the purchase nicely. The big four are probably limited in where they can buy due to competition commission worries, limiting them only to states where they are currently weak.

The obvious answer is that a foreign bank will buy one or more of them – but who? The foreigners that spring to mind are obviously HBOS, current owners of BankWest, who would be looking for scale (and are moving many positions to Sydney), HSBC, who do not currently have a large presence here and possibly a US bank – Citi springs to mind, but I am not sure they would want a small local bank or two in their portfolio.

HBOS is a little limited by legislation, but there are always ways and means. HSBC has no real impediments.

Smaller Institutions

I can only see continuing consolidation here – but mostly amongst themselves. The recent tie-ups – the Home & StateWest scheme, Community Alliance and Shoalhaven Paper Mill Employees, and the Credit Union Australia & Australian National Credit Union deals I see as part of a trend, driven at least in part by compliance costs. With all the regulation being imposed (some of dubious value) larger institutions are needed to spread the costs. The other thing driving some of this is the need to release capital. Some of the mutuals (the credit unions, for example) have very large amounts of capital tied up in the business and no way to release it short of running loses (not likely) or being taken over by a non-mutual. Walk up to your average member of a mutual and offer them a reasonable amount of money for something they did not know they have and the result is normally clear.

Longer Term

Longer term I can see the big 4 start to go. Westpac is the obvious first target, but, once these ones are in play, their relative size difference to a big foreign bank is not material. When (and it is when) one of them suffers a serious stumble you might see an opportunistic bid from one of the big foreigners. The only real way to avoid this would be for one or more of them to expand extensively overseas something they do not exactly have a good tr

Bank Loans ack record in.