Westpac abandons New Zealand demerger plans

Westpac’s move to avoid a costly split from its NZ business has ‘achieved its purpose’ of giving the Kiwi regulator something to think about, investors say.

Westpac will remain in New Zealand. Picture: NCA NewsWire / Christian Gilles

Westpac’s institutional investors are supporting the banking giant’s decision to avoid a costly split with its legacy New Zealand business, saying the whole exercise had “achieved its purpose” in giving Kiwi regulators something to think about.

“Keeping it all within the group is the best thing to do at this point in time given the additional capital they would have needed to split or float it,” Wilson Asset Management portfolio manager Matthew Haupt said.

“It’s a positive move to keep it all in.

“I was not too worried about the review because I never thought a split was going to happen.

“It was more of a warning to NZ regulators.

“The whole exercise has achieved its purpose.

“NZ regulators now have to think about the impact of what some of their tough changes can mean for their economy.”

Listed investment company WAM’s Leaders portfolio has Westpac among its top-20 shareholdings.

Westpac’s board on Thursday announced it had decided to retain ownership of the NZ business following an almost three-month review in the wake of the NZ central bank’s decision to impose stringent conditions on the sector.

Westpac’s NZ business accounts for about 15 per cent of the group’s total cash earnings, excluding lumpy and notable items.

The business has delivered higher returns on equity for Westpac across the group for the past five years, making it an easy decision for chief executive Peter King to retain the profitable arm.

Westpac’s return on equity for the half year ended March 31 came in at 10.2 per cent, while NZ’s ROE was 15.7 per cent.

Westpac NZ houses about $NZ90.6bn ($84.6bn) in loans and $NZ74.1bn in deposits, and was estimated to be worth between $NZ8bn and $NZ11bn ($10.3 billion) as a stand-alone entity.

Chief executive Peter King said a demerger of the business would not be “in the best interests of shareholders”.

“Our review identified opportunities to improve service for customers and value across the WNZL business and we will progress these with the WNZL Board and management team.

“WNZL is a strong business that has been serving New Zealand for 160 years.

“We remain committed to delivering for customers and fulfilling our purpose of helping Australians and New Zealanders succeed,” Mr King said.

CLSA banking analyst Ed Henning said Westpac’s decision not to spin off its NZ business “should not be a big surprise”.

“A number of banks have looked at potential transactions over the years and have all come to the same conclusion,” he said.

Citi analysts, who retained their ‘buy’ rating, said the developments likely reflected “the complexities of divesting from a liquidity and capital perspective”.

“The smaller and less liquid NZX would create a more difficult environment to conduct an IPO for a business of its size …,” Citi’s research note said.

“Valuation considerations were likely another key hurdle, with the RBNZ’s looming capital build rendering the pathway to a sustainable dividend unclear, along with medium-term returns.”

A new chief executive will soon be finalised to replace David McLean who retires on Friday.

Institutional and business banking general manager Simon Power has been appointed acting chief executive of the NZ arm.

In March, Westpac said it was considering the “appropriate structure” for its NZ ­operations, including a demerger, with Macquarie assisting with a review.

Then on June 3, The Australian reported Westpac’s board would this month assess a recommendation from Macquarie about whether to spin off the division.

Westpac’s operations across the Tasman have been subject to regulatory enforcement action for “material failures” in reporting its liquidity over eight years, with New Zealand’s central bank forcing Westpac to undertake independent reviews and hold more liquid assets.

Westpac has the smallest exposure to NZ among the four major banks, which have about an 85 per cent share of the NZ market.

The NZ government wants the banks to hold an extra $NZ20bn ($18.4bn) in capital over five years, which is among the toughest capital requirements globally.

Westpac’s NZ division posted a 98 per cent jump in cash earnings to $NZ583m for six months ended March 31.

Westpac shares were trading more than one per cent lower at $25.80 at 14.30 AEST.