Westpac’s expansion into Victoria paying off

Investment in the Bank of Melbourne appears to be paying off, but at what cost?

In 2011, Westpac (ASX: WBC) contradicted the actions of other corporations in the financial and banking industry when it decided to revive the Bank of Melbourne brand in order to break into the challenged Victorian market.

Since that time, credit growth has remained weak and many of Australia’s banks have shed or offshored jobs in order to cut costs and increase profitability. Westpac, on the other hand, has pumped its resources into the expansion of Bank of Melbourne with 72 branches now operating, in comparison to 34 branches which were operated under St George previously. Furthermore, it now has added an additional 100,000 new customers under the new brand, and operates with nearly 1,000 staff members.

However, although the brand has certainly grown in popularity – with its share in the Victorian state for mortgages and deposits having grown by 1.5% – analysts are still debating as to whether the multi-brand approach undertaken by the big four banks is useful or counteractive.

According to a Nomura survey last September, a majority of the 500 customers answered that interest rates and fees were the primary reason for choosing one bank over another, as opposed to switching for the brand. The banks, on the other hand, argue that the purpose of their multi-brand strategy is to ensure that one brand does not cannibalise the others.

National Australia Bank (ASX: NAB) and Commonwealth Bank (ASX: CBA) also operate following the same strategy, with NAB owning UBank and CBA owning Bankwest.

According to The Sydney Morning Herald, Bank of Melbourne is expanding its deposit base by around $1 billion every six months whilst Scott Tanner, the group’s chief executive, has stated that the brand is making a healthy profit. However, for Westpac shareholders, one does have to wonder the impact the brand will have on overall profitability. It has been estimated that $500 million is being spent on the initiative over a five-year period, which could counteract profits made by the group, although Tanner has stated that the bank is making a “fantastic” return on each of the branches being opened.

Foolish takeaway

Like Australia’s other major banks, Westpac has increased in value significantly over the past 12 months, due to its defensive nature and high dividend yields. Time will tell how the Bank of Melbourne will impact on the company’s overall profitability, but at today’s price of $29.40, Westpac is still quite an expensive prospect for your portfolio.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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