Mr Banker

Westpac’s purchase of RAMS story has a tantalising sidebar: what’s happening to the $14 billion loan book that Westpac did not buy.

Westpac’s sidestep

In my August 24 blog I told readers to steer clear of RAMS unless the founder bought in “in a big way”. He didn’t.

The board decided they could not be confident the securitisation market would provide enough funding at a rate that allowed them a profit, and have just announced the sale of the franchise network to Westpac. RAMS is the latest domino to fall from the sub-prime crisis.  

It seems Westpac has snapped up an absolute bargain, apparently increasing their retail presence by 10% for just $140 million.

But it’s what Westpac did not buy that is of greatest interest to your correspondent. Westpac has side-stepped the current loan book, a move that has mystified some of my colleagues. A $14 billion loan book might have become a marginal proposition to a lender reliant on the wholesale market, but a big-four bank with a strong retail deposit base has a wider spread and should have been able to squeeze out a nice profit. And the possibility of cross-selling the full suite of banking products to current RAMS customers would have been icing on the cake.

Here are four uninformed guesses as to why Westpac said no to the loan book:

Guess 1: It believed the quality of the loans was not up to the mark.

Guess 2: Liquidity is so tight in the current market that Westpac didn’t have the balance sheet capacity to take over the loan book. (If this is true, borrowers should beware. If there really is that much pressure on the bank balance sheets then all banks – not just Westpac – will be trying to offload their “worst” loans, and may be upping interest rates into the bargain).

Guess 3: The bank thinks that by waiting it can get them at a lower price. This is another intriguing sideshow. RAMS shocked the US market by invoking its right to defer the repayment by six months. The left-behind management of RAMS is now madly trying to secure replacement funding to allow that deferred repayment (Westpac has agreed to be a “cornerstone” funder – as part of a syndicate, and at a “commercial rate).

Guess 4: If they can organise replacement funding, all well and good. If not, then apparently the loan book is auctioned to the highest bidder.

They have made a mistake.

Now my experience is that large corporates make far more dumb decisions than smart ones, so I have Guess 4 starting as favourite, followed by Guess 3 But time will tell.

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