Wesfarmers needs $50m for banking licence

Coles’ parent to set aside at least $50m in Tier 1 Capital to meet APRA guidelines

Wesfarmers (ASX:WES), the parent company of supermarket retailer Coles, will need to set aside at least $50 million if it wants to be successful with its application for a banking licence.

Coles wants to offer savings account to its customers under its own name, rather than in partnership with a bank, according to the Australian Financial Review. The Australian Prudential Regulation Authority (APRA) has strict rules for companies wanting to hold a banking licence or operate as an Authorised Deposit-taking Institutions (ADI), including holding at minimum of $50 million in Tier 1 Capital.

Coles already issues car insurance and credit cards as its financial services, but appears to be following in UK supermarket giant Tesco’s shoes. Tesco offers a range of financial products, including car, home, travel and health insurance, savings accounts, personal loans and even fixed and variable rate mortgages. Tesco has also recently received permission to form its own pension management scheme, to manage the estimated £6 billion in assets for its 170,000 employees. With several senior executives at Coles coming from Tesco, it’s probably no big surprise that Coles wants to offer more financial products.

Tesco’s rivals have also increased their drive into financial services, which could see Woolworths (ASX:WOW) follow Coles. Woolworths has so far had a dismal financial services offering, but the move by Coles could see Woolworths finally bite the bullet and firm up its financial products suite.

But it could have a major impact on Australia’s banks, by increasing competition for savings – an increasingly important source of funding for the major banks – as well as competition for mortgages and personal loans, should Coles role out the full ‘Tesco model’. The big four banks, ANZ Bank (ASX:ANZ), Commonwealth Bank (ASX:CBA), National Australia Bank (ASX:NAB) and Westpac Banking Corporation (ASX:WBC) get around 60% of their current funding from deposits, and control an estimated 80-90% of the mortgage market.

Foolish takeaway

Coles’ application for an ADI licence could take up to twelve months to be approved, depending on the complexities involved, and APRA assesses each application on a case-by-case basis. While the move by Coles could be seen as a serious threat to the banks, Australian consumers are notorious for sticking with their bank, despite the benefits of switching to smaller lenders and other financial services providers.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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