Why Westpac shelved New Zealand spin-off

Westpac – led by chairman John McFarlane – has opted not to proceed with a spin-off of its NZ division. Picture: Adam Yip

In the end, Westpac’s view of minimal upside for the bank and its investors from hiving off its Kiwi operations put the nail in the coffin of deliberations to demerge the unit.

Westpac’s board and management made the final call to end the assessment of a spin-off the New Zealand arm, but the bank’s view was highly consistent with adviser Macquarie Capital’s analysis and recommendation.

Westpac on Thursday ended deliberations to spin off its NZ unit, after a multi-month review worked on by the bank and Macquarie led by Marianne Birch and her team. The Australian revealed early this month Macquarie was set to provide its key advice to Westpac at a June board meeting.

The analysis was complex but the rationale for moving ahead with a spin-off was hindered by the sizeable costs of separation, and the fact any shareholder benefit would take years and probably prove negligible.

The separation may have spurred a rerating of the Australian operations, but given the complexity of the demerger and the time involved to unpick and separately list the business, the cost benefit analysis was not compelling.

Attention now turns to New Zealand personnel matters. Starting with filling the chairman’s role for the NZ entity that is being ­vacated by a retiring Jan Dawson, the former chairman and chief executive of KPMG NZ. That process is well progressed and an ­appointment is expected ahead of Westpac securing an executive to run the Kiwi division, reporting to group CEO Peter King.

The bank in May said NZ boss David McLean would retire from Westpac on June 25 after more than two decades. Simon Power, general manager institutional and business banking, takes the reins in an acting capacity while the global search is completed.

Westpac’s analysis of whether to demerge NZ made some sense given it has the smallest presence in that market among its big four Australian peers. But equally, it is the right move to walk away swiftly if the numbers don’t stack up.

Westpac group chairman John McFarlane, a former ANZ CEO, would have contributed significantly to the NZ debate given his intimate knowledge of the market.

It was McFarlane who spearheaded ANZ’s $5bn acquisition of National Bank of NZ in 2003, which involved a rights issue and sweeping integration program.

It was largely the increased capital and regulatory impost across the Tasman that had Westpac revisiting the numbers on its presence in New Zealand.

Shifting regulation including markedly higher capital requirements for core capital and conservation buffers – being phased in by NZ’s central bank over several years until 2028 – are viewed as excessive by some banks.

Then there is New Zealand’s BS11 outsourcing policy to take into account, while Westpac would have closely looked at funding obligations and franking credits. A spin-off transaction would also have resulted in an earnings hole – some 15 per cent, which is what the NZ arm contributes to the group’s bottom line.

Westpac’s board will now return its transactional attention to a divestment program that will result in the auto loan unit being sold to private equity group Cerberus Capital Management. The life insurance division sale is also in the final throes and will be followed by auctions of Westpac’s ­investment platforms and superannuation businesses.

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PayPal board hire

PayPal Australia has quietly been beefing up its board as it confronts a real risk of enforcement action, including in court, by financial crimes regulator Austrac.

A filing with the corporate regulator showed PayPal’s local entity has appointed ASX-listed Sims chairman Geoff Brunsdon as a non-executive director on its board.

Brunsdon would have immense experience in dealing with local regulators in his role at Sims and as local chairman of MetLife Insurance and APN Funds Management. Before his non-executive director roles, he was head of investment banking at Merrill Lynch Australia.

PayPal is in hot water with Austrac for incorrectly filing required international funds transfer instructions, and the regulator is considering what enforcement action to take.

PayPal appointed accounting firm EY as an independent auditor and submitted four interim reports to Austrac, with a final one being lodged in August last year. Accounting firm PwC is PayPal’s regulator auditor, according to its latest local financial accounts.

PayPal’s global accounts disclosed that Austrac notified it of an investigation by its enforcement team on matters in the external auditor’s final report.

Brunsdon will be a timely addition to the PayPal local board, which also counts NextDC board member and former HSBC Australia CEO Stuart Davis among its ranks.

If bid documents are anything to go by, it appears the APN Funds board role will continue for Brunsdon, despite live merger activity.

Property group Dexus disclosed a bid for APN Property Group – the parent of APN Funds – in May, as part of a push further into funds management.

APN Funds is the responsible entity for various APN investment and managed funds vehicles, and is expected to retain that role and an independent board as part of the takeover.

The change to PayPal’s local board comes as Austrac kicked off its latest enforcement blitz this month against National Australia Bank, Crown Resorts, Star Entertainment and SkyCity Entertainment. The cases involve multi-year investigations into possible breaches of anti-money-laundering and counter-terrorism financing legislation.

Westpac last year agreed to pay a record $1.3bn penalty to Austrac to settle court action by the regulator, which followed Commonwealth Bank’s $700m settlement in 2018.