Macquarie Group (ASX: MQG) and a group consisting of Pepper Australia and Bank of America (NYSE: BAC) have emerged as the final bidders for the Australian operations of Lloyds Banking Group, known as Lloyds International.
Lloyds’ Australian operations include Capital Finance and BOS International. Capital Finance finances motor vehicle and equipment purchases, while BOS International offers services to large corporations. For example, BOS was the lead manager for Telstra (ASX: TLS) when it raised more than $1 billion through corporate bonds in March this year.
Bank of America is interested in BOS, which may signal that it thinks that American investors want to lend to Australian companies. Meanwhile, Pepper is reportedly after the Capital Finance business. Macquarie Group would be a natural home for both businesses. Lloyds was undercapitalized at the end of 2012, and this asset sale is part of the process of improving the financial standing of the bank.
Arguably, Macquarie is in expansion mode again. Its main Australian rival, Babcock & Brown, went out of business during the GFC. Since then, Macquarie has suffered subdued earnings. However, the investment bank has been originating more domestic mortgages, in competition with the big four, and has posted improved earnings for FY2013. Despite outliving its rival, Macquarie Group’s 2013 profit is less than half what it earned five years ago.
Interestingly, this transaction has its roots in the GFC. Lloyds acquired the Australian businesses when it rescued HBOS in 2008. This move arguably exacerbated Lloyds own problems, and the bank was bailed out by the UK government shortly thereafter. UK taxpayers were rewarded for their efforts in September this year, as the government was able to make a considerable profit on the sale of some of its shares. The UK government continues to hold shares in the bank.
Commentators had suggested that Westpac (ASX: WBC) was the frontrunner for Lloyds’ assets, but the bank failed to make a final bid, as did the other major Australian banks. Corporate lending has been relatively subdued since the GFC, and the winning bidder may end up doing well out of the transaction if the price paid reflects this.
While banks are often considered safe investments, the GFC comprehensively demonstrated that bank shareholders can lose in a big way. Retail investors will do better if they do not constrain themselves to well-known blue chip companies, as it is difficult for them to gain any kind of edge over more ‘sophisticated’ investors.
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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.
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