Westpac deal raises hopes of Australia bank shake-out

By Victoria Thieberger

MELBOURNE (Reuters) - The largest banking takeover in Australia's corporate history has spurred investors to pile into shares of smaller banks in the hope of a sector shake-out.

Westpac Banking Corp Ltd's (WBC.AX: Quote, Profile, Research, Stock Buzz) $17.6 billion all-share bid for smaller rival St George Bank Ltd (SGB.AX: Quote, Profile, Research, Stock Buzz) would create the country's biggest bank by market value, possibly spurring one of the other major banks to bid for a smaller regional lender.

Other scenarios suggested by analysts included the merger of two regional banks, or a rival major attempting to block the St George deal.

"It's the infectiousness about the takeover. Regional banks are being watched because of the need for the major banks to reap greater efficiencies in the face of the uncertainties around the world," said Austock senior client adviser Michael Heffernan.

Australia's banking sector is governed by the "four pillars" policy, which prevents the four biggest banks -- which account for about 70 percent of total banking assets -- from merging with each other.

Fourth-ranked Westpac skirts that restriction with its bid for No.5 St George, but investors are speculating another big bank may be provoked into pursuing a lender with a large regional presence.

The new Labor government is likely to be reluctant to amend the "four pillars" despite challenges from bankers, because it would decrease competition and lead to widespread job cuts.

Shares of potential regional targets soared for a second day, though analysts were more skeptical than investors that a deal would emerge.