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Devil in the detail

25 March 2021 By Antony Currie

Unveiling plans to potentially offload a business the same day a regulator slams it isn’t exactly tactful. And yet that’s precisely what Westpac did on Wednesday, hours after the New Zealand Reserve Bank accused the Australian lender’s local subsidiary of having poor risk and technology controls for years. A looming increase in capital requirements is a genuine reason for concern, but the country could turn out to be a tough place to leave.

Westpac is in self-described recovery mode after being badly bruised in a long and highly publicised public investigation into Australia’s biggest banks a couple years ago. Peter King, the financial chief who put his retirement plans on hold to become chief executive on a permanent basis in April, has been selling other local and overseas divisions. He also wants to trim costs and invest in technology.

Demerging the Kiwi lender could bring in NZ$11.5 billion ($8 billion), if valued at the same 1.5 times trailing book value as smaller rival Heartland, although Westpac’s unit generates a lower return on equity. In any event, the money would come in handy, as would the ability to focus on its home market, where there’s plenty of work to do. An Australian regulator in December lambasted Westpac for its “immature and reactive risk culture, unclear accountabilities, capability shortfalls and inadequate oversight”.

A sale would be tricky, though. The big four New Zealand banks – all Australian-owned – control almost 90% of the market, so are unlikely to be allowed to buy. Other foreign financial institutions also may be hesitant about owning a lender in need of essential upgrades that operates in a small, mature market. Spinning it off onto New Zealand’s stock market would be more appealing, but it would take time to sell it all. And Westpac either would have to fix it up first or divest at a discount.

Moreover, the New Zealand capital hikes King seems worried about shouldn’t affect Westpac much. It’s less than NZ$666 million short of the new target, or less than a tenth of its common equity. And Westpac has seven years to get there. Ditching New Zealand may be more trouble than it’s worth.


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