The news that Westpac is considering a demerger has come as a surprise to many. Westpac NZ is the third biggest bank in the country and has proven a highly profitable arm for the parent group. Besides being the NZ government’s banker, it caters to a customer base of 1.3 million and controls a market share of about 20%.
In their last annual results, Westpac NZ reported net loans of $89m and profits of $681m on assets of $113 billion. This return was a 40% decline in profit as compared to the previous period due to the pandemic and low-interest rates. It was however on par or exceeded that of the multinational’s Australian operations.
Westpac NZ has been in existence for over 160 years with consistently excellent performance in their retail and commercial banking. The consideration of selling off this arm of the company is however being viewed as being in the best interest of its shareholders. The bank announced the possibility of a demerger as part of their “fix, simplify and perform” strategy.
Though not finalised, this revelation has come shortly after the Reserve Bank of New Zealand (RBNZ) indicated concerns over Westpac’s risk governance processes. The RBNZ is requiring Westpac to pay for two independent reports on their risk governance processes. It has also pointed out ongoing compliance issues related to material failures to report liquidity in line with regulatory requirements. The RBNZ is also going to require banks to hold more capital against their lending in the coming year.
Industry experts believe that the increased intrusive regulation from the RBNZ may be a cause for concern for Westpac and other banks. Westpac has indicated the changing capital requirements and required structural changes to separate the NZ arm from its Australian parent group as reason enough for the company to reassess what structure would best suit its investors going forward.
Despite how closely timed the announcements from Westpac and the Reserve Bank were, industry experts do not believe the idea of a demerger is a knee-jerk reaction. According to the First Union national finance organiser, Callum Francis, these plans to exit the NZ market may have been in discussion long before compliance issues were raised by the Reserve Bank.
There is much speculation as to how such a divesture could happen. Westpac NZ is publicly listed. Some experts like KPMG’s head of banking and finance, John Kensington, believe an initial public offering may be on the cards. He also expressed doubt that any of the remaining three top banks would be allowed to buy Westpac NZ’s business due to competition and regulatory concerns. There is also some concern that a Westpac NZ exit could trigger other Australian banks to follow suit.