Westpac Bank considers selling New Zealand business, cites RBNZ pressure

Westpac is reviewing its New Zealand business and may look at demerging from its Australian parent via a sale.

Depending on the outcome the local division could fetch as much at $15 billion, according to a “stab in the dark” estimate by Massey University banking expert Professor David Tripe.

He doubted the bank would end up selling to another bank, although it could look at a separate sharemarket float on the NZX. The bank is currently dual listed on the Australian and New Zealand stock exchanges.

“It’s not something that is going to be easily purchased and if you started breaking it up, you would lose much of the value,” Tripe said.

Westpac said in a statement it has already placed a number of businesses into a specialist businesses division, “for ultimate exit”. It has reportedly appointed Macquarie as an adviser.

“We have also announced the consolidation of our international operations in Asia. Westpac is also assessing the appropriate structure for its New Zealand business and whether a demerger would be in the best interests of shareholders.”

It said it was in the very early stage of this assessment and no decisions had been made but it did cite the pressure regulators were applying to the banking sector.

“This will also consider the impact of the Reserve Bank of New Zealand’s (RBNZ) reviews.”

Earlier today the Reserve Bank told Westpac it must commission two independent reports to address concerns the regulator has around the bank’s risk governance processes.

Geoff Bascand, deputy governor and general manager of financial stability at the Reserve Bank, said it had experienced ongoing compliance issues with Westpac New Zealand in recent years.

Bascand said most recently it had dealt with the bank over material failures to report liquidity correctly and the bank had continued to operate outside of its own risk settings for technology for a number of years.

It had also required Westpac to provide a separate independent report to provide assurance that the actions they have taken to improve the management of their liquidity risks, and the culture surrounding it, are effective.

Bascand said until it was satisfied that Westpac’s remediation work was complete and effective it was increasing the bank’s required holding of liquid assets.

Westpac said its New Zealand business continues to perform well with a strong position in retail and commercial banking.

“However, given the changing capital requirements in New Zealand and the RBNZ requirement to structurally separate Westpac’s NZ business operations from its operations in Australia, it is now appropriate to assess the best structure for these businesses going forward. Westpac will provide further updates as required.”

Westpac is New Zealand’s third-largest bank with about 20 per cent of the market.

The bank’s New Zealand’s cash profit dropped 38 per cent, or $393 million, to $649m for the year to September 30, 2020 – driven by lower income and higher impairments caused by the fallout from Covid-19.

The bank’s impairment charges were $320m, up from a $10m benefit the prior year.

Tripe said he expected any sale of the bank to be a long and drawn out process. He offered a “stab in the dark” value estimate of $12-$15b for the full New Zealand banking operation.

“I would be surprised if it proceeded, due to its size and complexity, unless they ended up giving it away quite cheaply,” Tripe said.

“Interesting,” Craigs Investment Partners head of private wealth research Mark Lister said.

“There would certainly be no shortage of investor appetite for the New Zealand business of a major Australian bank, given that we want more companies on our market and the banks are all well capitalised, well-run businesses and are household names,” he said.

“It would be very well received by the investment community and the NZX,” he said.