How will Westpac and St George share the spoils should they get the all clear to merge later this year?

While the obvious aim of any merger is maximising profit, and thus dividends, and thus, for listed companies, the share price, the key controversy is over what increment on the profit this merger will deliver. Or to put that differently, what proportion of the reduced costs (on average) will Westpac return to customers by way of lower prices?

In a lot of business mergers these points may seem ho hum. But proponents of this merger need to satisfy the ACCC, Wayne Swan, and maybe the court of public opinion as well.

First up, a few basics on what’s proposed by Westpac, taken from the media release lodged with he ASX this morning and their conference call with investors.

Westpac plan to offer 1.31 Westpac shares for each St George share, which values St George at $33.10 based on Friday’s closing prices. Surprisingly, Westpac management this morning declined to provide any detailed financial metrics (which they say they will spell out later). Westpac’s chief financial officer did say the merger would increase earnings per share after three years.

The banks say no St George branches will close, a populist position designed to help clear the regulatory hurdles but which is also a little odd. The whole point of this, and any other merger in banking is to extend the scale, to push more transactions and more loans through a single processing engine (well, lot’s of out of date, slightly disorganised engines in reality, but that’s the principle) and thus to lower units costs of every piece of their business.

How Westpac will divide this is thus a sensitive topic.

Among consumers, and some businesses, there’s always plenty of bleating about the cost of banking; some justified, some not.

One fact of life in banking today is that the costs of banking are going up for borrowers. Interest spreads of all lending products have risen since credit markets went a little crazy nine months ago.

Costs of transaction banking are harder to measure. Growth in aggregate fee income across banking lags growth in bank assets, with the RBA, in its most recent annual survey on the topic (almost a year ago) to conclude that growth in fee income appears to have been mainly the result of an increase in the use of banking services rather than higher unit charges.

Based on the Westpac rhetoric from the first day or so of the news cycle on this merger it looks like their line is that the merger will improve the quality of services (with some babble in the media release this morning about “an enhanced offering”) rather than reduce the cost of services.

So work it out: is this bank merger a plus for users of Westpac’s products and services?

Probably not.