Drive for efficiencies means fewer regionals; whether or not Bank of Queensland is successful in its proposed merger with Bendigo Bank, there is little doubt that the ongoing quest for economies of scale will lead to further consolidation among Australia's regional banks

Australian Banking & Finance, April 15, 2007 by Peter-John Lewis

Share prices of all Australia's regional banks surged in response to the announcement that Bank of Queensland planned to join forces with Bendigo Bank with the aim forging a $4 billion regional banking juggernaut.

The proposed merger, if successful, will bring together 575 bank branches that service 1.5 million customers in all Australian states and territories. It creates an entity that will rival the other 'big small banks' such as St.George and Suncorp-Metway, in terms of size and influence.

Even if the bid fails, it is still widely expected to trigger a wave of mergers and acquisitions involving the smaller Australian financial institutions. This could reduce the number of regional banks operating in Australia to just a few 'mega-regionals'. Alternatively, it could lead to takeover bids for smaller institutions from Australia's major banks or large international players.

In announcing the merger plan, Bank of Queensland managing director, David Liddy, indicated that the need for enhanced efficiencies in the regional banking sector was a driving force in his organisation's move on Bendigo Bank.

"This merger is important for the future of banking, particularly regional banking, in Australia. It's about recognising the changing landscape of the Australian financial services sector, and working together to be a more effective force and an alternative for the Australian public," Mr Liddy said.

"We see this transaction as a clear opportunity for two of the top regional banks to come together as a merged entity to create Australia's 'big small bank' and ensure the sustainability of regional banking services in Australia."

In an increasingly competitive banking environment, regional banks can benefit from the scale and efficiency gains that consolidation might bring with it. These, in turn, could enable them to provide better service to customers across a wider geographical footprint. Increased scale may also facilitate larger investments to support continued growth, better compliance to regulatory standards and an enhanced capability to meet more stringent capital requirements.

According to KPMG's Financial Institutions Performance Survey for Regional Banks 2006, regional banks in Australia have been flourishing in recent times.

"Australia's regional banks continued to make the most of a strong environment and showed the benefits of branching out of their traditional markets with another strong year of double-digit growth in underlying earnings produced in a very competitive market," the report stated.

"In doing so, they once again showed that size is not everything in financial services."

KPMG identifies only six regional banks operating in Australia today--St. George Bank, Suncorp-Metway, Adelaide Bank, Bank of Queensland, Bendigo Bank and Elders Rural Bank. (BankWest, which some think of as a regional, is a subsidiary of international powerhouse HBOS.)

If the likely wave of consolidation materialises over the next year or two, these healthy six could be reduced to an even more prosperous and formidable three or four.