Westpac chairman John McFarlane and his board mull NZ demerger

Westpac chair John McFarlane: weighing the Kiwi split. Picture: Adam Yip

For Westpac chairman and former ANZ chief executive John McFarlane, deliberations over whether to spin-off the Sydney-based bank’s New Zealand business must be bittersweet.

It was McFarlane that spearheaded ANZ’s $5bn acquisition of National Bank of NZ in 2003, which involved a large rights issue and significant integration program. The decision went against the wishes of some shareholders at the time who had concerns about the limited size of the Kiwi market and its potential growth prospects.

Eventually in 2012 – under the stewardship of his successor Mike Smith – the National Bank of NZ brand was integrated into ANZ’s brand.

Fast forward to 2021, and now at the helm of Westpac’s board, McFarlane is involved in potentially hiving off the bank’s NZ unit via a demerger.

To be fair, the positions of the two banks in NZ are at opposite ends of the size spectrum, with ANZ having the largest presence among the Aussie banks across the Tasman and Westpac the smallest.

The Westpac demerger deal is also still finely balanced as to whether it proceeds.

The spin-off is the subject of an intensive piece of analysis by Macquarie Capital, and there are said to be varied views on the board on the merits of a demerger.

Macquarie is set to make a recommendation to the board at a meeting later this month, but it will likely take some months before a final decision is forthcoming on which way to go.

There are many factors to consider, including the health of capital markets and the NZ economy, and expectations over how a separate NZ entity would trade for existing Westpac shareholders. Shifting regulation including higher capital requirements and NZ’s BS11 outsourcing policy also form part of the mix.

The bank’s funding obligations are also top of mind, franking credits need to be considered, as does the earnings hole – some 15 per cent – that the spin-off of NZ would create.

Demerger separation work including how to deal with shared functions and other related costs in such a large undertaking would be weighed up.

Westpac is already conducting a global search for a new boss of the NZ division, which is happening concurrently to deliberations on the demerger.

A clear path will need to be bedded down before any external executive would agree to take on the role, given how different the job would be as part of Westpac versus CEO of a separately listed entity.

McFarlane and the Westpac board have a big task ahead to closely assess the demerger proposition, gauge investor views and ask the hard questions of Macquarie to determine whether to forge ahead.

That is occurring against the backdrop of Westpac disposing of a spate of businesses in its specialist unit, as it retreats to its core banking operations.

Those efforts are being led by executive Jason Yetton, who is being flanked by various investment banks.

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Cartel watch

The legal road on the damning cartel charges against ANZ, Citigroup and Deustche Bank continues to be long and winding for the banks and the six former and current executives also facing criminal charges.

As the legal wheels slowly turn, the parties are gathering as much information to form the basis for their respective arguments.

This week, the Federal Court said leave would be granted to the prosecutor and each of the accused for access to inspect, uplift and copy the documents produced by the ASX in response to a subpoena. The exchange was responding to a subpoena for documents – from last month – issued by the defendants.

That follows a hearing on Tuesday where ANZ accused the competition and corporate regulators of “wheeler dealing” in the way they drafted JPMorgan as a witness, immune from prosecution, and redacted key parts of communication.

Federal Court judge Michael Wigney is set to inspect the redacted sections of the 10 documents in question, to decide whether to allow ANZ, Citigroup and Deutsche Bank access to those parts.

In a hearing on Tuesday, JPMorgan and the Australian Securities and Investments Commission argued the redacted documents were covered by the legal rule “without prejudice privilege”, meaning they must stay confidential.

The hearing also revealed that ASIC in March wrote to JPMorgan, Citigroup and Deutsche to communicate it was not taking enforcement action against them relating to its probe into ANZ’s controversial 2015 capital raising.

The cartel legal battle is set to go to trial in April and run through till the end of September 2022.

That is about seven years after the ANZ capital raising in which the Australian Competition and Consumer Commission alleges the cartel activity took place, and four years since the legal action was started.

The banks and individuals will no doubt be analysing this week’s comprehensive loss by the ACCC in its first ever criminal cartel case against Mildura-based Country Care.