Westpac’s New Zealand arm left out of ratings upgrade

S&P has excluded Westpac’s NZ operations from a revision of its outlook for banks, citing potentially reduced support from the parent.

Westpac is mulling a demerger of its New Zealand division. Picture: NCA NewsWire / Christian Gilles

S&P Global Ratings has excluded Westpac’s New Zealand arm from a sweeping revision to its outlook on the long-term ratings of large banks to stable from negative, citing potential reduced support from the parent.

S&P on Monday upgraded its outlook on Australia’s coveted AAA debt rating from “negative” to “stable”, ranking the economy as only one of three this year to have received a positive upgrade.

The surprise move had knock-on effects for large banks with all four majors and Macquarie Bank seeing a revision on S&P’s outlook to stable on their long-term issuer credit ratings.

“At the same time, we affirmed our ‘AA-’ long-term issuer credit ratings and ‘A-1+’ short-term issuer credit ratings on each of the four major banks,” S&P’s assessment on the banks said.

S&P also, though, retained a negative outlook on Westpac NZ given the Australian bank is considering a spin-off of the division, but the ratings agency said a demerger was “unlikely within the next year or so”.

ANZ chief executive Shayne Elliott on Tuesday welcomed the upgraded outlook for Australia by S&P and said it bode well for maintaining historically low borrowing costs for home buyers and businesses.

“What it means over the long term, it means that Australia is still able to go and borrow money, whether that’s from the banks getting it or the government internationally at a really, really good rate,” he said.

“The reaffirmation of it doesn’t really mean a lot, but boy, when you lose it, what happens is the cost of borrowing goes up and that ends up being paid for by mums and dads in terms of their mortgages or businesses.”

The Australian last week revealed the bank’s board will later this month assess a recommendation from adviser Macquarie on whether to hive off the $10.3bn New Zealand unit to shareholders.

During an S&P webinar on Tuesday, S&P’s Lisa Barrett said Westpac’s NZ unit wasn’t “significant enough” to the parent’s earnings to impact the major bank’s ratings. She also said Westpac, if it pursued a demerger, would initially be mindful of potential “material damage” to its reputation and brand as it executed a separation and would not allow the NZ arm to get into financial distress.

S&P’s report said the negative outlook on Westpac NZ reflected the potential for reduced support from the parent in light of demerger deliberations, which could indicate the division was reducing in strategic importance.

“In our base case, we expect our issuer credit rating on WNZL would remain at the same level as the rating on its parent over the next two years, reflecting our view that WNZL remains highly likely to receive extraordinary financial support from Westpac under all foreseeable situations,” it added.

But in a downside scenario S&P noted: “We expect to lower our issuer credit rating on WNZL to ‘A+/A-1’ in the next two years if we considered that WNZL’s strategic importance to the group has reduced and consequently it is less likely to receive timely support from Westpac, if needed.

“This is likely to occur if Westpac decided to proceed with the demerger. We see a one-in-three possibility of a downgrade of WNZL in the next two years.”

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

Westpac’s shares closed 0.4 per cent higher at $26.73 on Tuesday. That followed a drop of 0.9 per cent in the stock the prior day, as the banking sector was hit with concerns about Austrac’s focus on lenders meeting their financial crime compliance obligations.

Separately, on Victoria’s latest Covid-19 lockdown Mr Elliott said ANZ hadn’t experienced a marked pick up in customer calls. But he lamented new state taxes including changes on payroll tax.

“We’re getting taxed for employing people. And that tax is going to cost us 20-odd-million dollars … people might say that’s not a lot. Well, it’s the equivalent of 200 people’s jobs.”