Could rumours over a Westpac (ASX:WBC) mega-merger ever become facts?

Rumours on the grapevine have persisted around a potential merger between Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ).

The big four have stood the test of time as the cornerstone of Australia’s financial system. In fact, the big four is a protected structure by the Australian Government under the longstanding “four pillars policy”. However, the important distinction is that its government policy, not legislation.

For this reason, whispers of ANZ and Westpac exploring a merger have sparked speculation among investors. But does any potential deal hold water?

Is there merit in a Westpac merger on the ASX?

Over the years, the four pillars policy has received criticism for being outdated. This government policy acts as a blockade against any of the four major banks merging. The point of it is to maintain a competitive industry within banking for the sake of consumers. However, the policy is not law — which means there is always a slight possibility.

Word on the street is ANZ, Westpac, and National Australia Bank Ltd. (ASX: NAB) are feeling out their options. Although, these rumours have not been confirmed. Regardless, the question of whether a Westpac/ANZ merger would make sense is an interesting one.

According to Jefferies bank analyst Brian Johnson, a mega-merger of Westpac and ANZ would better serve the latter rather than the former. More importantly, the turbulence created by such a deal would mostly benefit the Commonwealth Bank of Australia (ASX: CBA).

If this was to play out, the exchange ratio would favour ANZ, but disruption would add impetus to CBA’s operational outperformance

Brian Johnson, Jefferies

In explaining this reason, Johnson mentioned how cost synergies often don’t go to plan in the banking industry. For instance, Westpac’s acquisition of St George Bank was paraded for the potential to integrate IT systems and reduce costs, the reality ended up being far different.

The attempted simplification resulted in a more complex beast, and 13 years later, the home lending systems are still separate.

What’s the odds?

A merger involving Westpac on the ASX is unlikely in the eyes of the lead banking analysts for a couple of reasons. Firstly, the four pillars policy remains in place, with the government likely to uphold it if it needed to. The patchy track record of the banks’ behaviour as uncovered by the banking royal commission further enforces this.

Secondly, the Australian Prudential Regulation Authority (APRA) would likely oppose a merger. Johnson believes APRA would be wary of its impaired ability to contain the damage if a bank became stressed. The regulatory body would possibly struggle to force a strategic merger if one of the big four were to be removed.

Compared to the other big banks on the ASX, Westpac’s share price has underperformed since the beginning of the year.

The post Could rumours over a Westpac (ASX:WBC) mega-merger ever become facts? appeared first on The Motley Fool Australia.

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Motley Fool contributor Mitchell Lawler owns Commonwealth Bank of Australia. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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