Westpac and St George: A three-year IT hangover?

Westpac and St George: A three-year IT hangover?

Summary: In the wake of the confirmed AU$18.6 billion merger between Westpac and St George Bank, observers have forecast that the IT hangover from the deal could take at least three years to wear off, but in the process the merged banking entity will become one of the largest IT shops in Australia.

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As Westpac and St George bank confirm their AU$18.6 billion merger plans, observers forecast that the IT hangover from the deal could take at least three years to wear off.

The banks announced the deal in a joint statement released this morning, confirming that a merger implementation agreement is currently being negotiated, and will go ahead pending approval from the Australian Competition and Consumer Commission and Federal Treasurer Wayne Swan.

Westpac CEO Gail Kelly

Credit: Westpac

The merger will create one of Australia's largest financial institutions and one of the private sector's "biggest IT shops", according to Michael Warrilow, director of research firm Hydrasight.

"It will be the largest IT shop in the banking space, but also across the board in terms of total IT staff and spend, rivalling the big government departments like Defence, the ATO and Immigration," he said.

While details of the banks' plans for IT have so far been scarce, with representatives from both St George and Westpac unable to provide any further information, former St George CEO and current chief of Westpac, Gail Kelly, hinted at an expansion of the new entity's IT capability should the merger be approved.

"The increased scale and integration of operations would drive further investment in our back office processes," said Kelly in a statement.

"The big winners here are potentially the St George IT staff," said Hydrasight's Warrilow, "with so much of Westpac's IT competency tied to IBM, they may relish the chance to get a hold of the staff from St George's much more in-house operation".

Westpac is nearing the end of its 10-year IT outsourcing deal with IBM Global Services, which is valued at around AU$4.3 billion and due to expire in 2010.

"The announcement is very interesting timing wise, even if just by coincidence," said Warrilow. "With Westpac's contract with IBM coming up for renewal in 2010 ... we may see the two come together and return to the 'superbank' model with the sudden influx of in-house IT skills from St George."

"The whole thing will take years to play out and integrate completely," he said, estimating that the banks' respective IT departments will be tied up for at least 24 months.

This sentiment was echoed by IBRS analyst Alan Hansell.

"It's not an insurmountable challenge from an IT perspective ... it'll take 18 months to three years ... but it's not like mixing oil and water," he said.

Hansell believes the "similar platforms" shared by the two banks will ease the integration process, however, Hydrasight director Warrilow also warned that a "messy battle" could be ahead over back office processes for the emerging banking giant.

"They might argue about who's got the best systems, in time they might want to just start again with a clean slate, but they'll have to run duplicate systems until they switch over," said Warrilow.

IBRS's Hansell believes that neither party will push to have any front-line banking services integrated "until they've got the major retail back-end banking systems together", which he estimates may take up to two years.

Hydrasight's Warrilow, however, believes that the banks will attempt to integrate their front-line operations sooner than expected, given the markets preference for a cohesive front: "A split's not very palatable from a brand point of view ... the market will really want to see something cohesive as soon as possible, so I think we can expect to see Internet banking and access integrate relatively soon."

According to Warrilow, the banks can expect to arrive "with at least two of everything on day one", which will lead to cost cuts "across the board" over development, Internet banking and mortgage origination through to e-mail systems.

Topics: IBM, Banking, CXO, Government, Government AU, Outsourcing

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