In the end it was a no brainer for Westpac to retain ownership of its NZ banking operations. The bank announced its decision early Thursday morning in a statement to stock exchanges.
Demerging Westpac NZ from the parent Westpac Banking Corporation made no sense, with higher funding, administrative and transaction costs, a big marketing spend and the future use of the Westpac name – all of which would have damaged the attractiveness of the spin off – killing off the idea.
A demerger would have created a separate business worth about $10 billion, analysts said when the news broke in March after the Reserve Bank of NZ insisted the country’s banks needed to be more strongly capitalised than Westpac believed was appropriate.
The announcement came on the same day as the RBNZ ordered Westpac to pay for two independent reports into its risk governance processes. The RBNZ had found deficiencies in these processes.
If it had spun off the NZ banking business, Westpac would have lost around 15% of earnings.
Westpac shares dipped 0.9% to $25.83 yesterday – not because of the decision to retain the NZ business but because of investor worries about rising interest rates in the US.
In its brief statement, Australia’s second-largest lender said it would work on potential opportunities identified in the review to improve value across the business, but did not elaborate further.
The priority would be to finalise the appointment of a new chief executive to replace the unit’s boss David McLean, who is set to retire on June 25, Westpac said.
The units of the Big Four – Australia and New Zealand Banking Group, Commonwealth Bank, National Australia Bank, and Westpac – dominate over 85% of the New Zealand banking market and there was no certainty that an independent Westpac could have competed with the local arms of its Australian rivals
Westpac CEO Peter King, said in the statement that after a detailed review, “we believe a demerger of the WNZL business would not be in the best interests of shareholders.”
“Our review identified opportunities to improve service for customers and value across the WNZL business and we will progress these with the WNZL Board and management team.
“WNZL is a strong business that has been serving New Zealand for 160 years. We remain committed to delivering for customers and fulfilling our purpose of helping Australians and New Zealanders succeed,” Mr King said.
Westpac appointed Macquarie to conduct the review. Details of that review have not been released but analysts say the Westpac NZ would have faced a lowering of credit ratings by major groups like S&P, Fitch and Moody’s, which would have increased borrowing costs.
As well separating the two banks would have been tough and licensing the Westpac name to the NZ would have been a major expense for the independent bank.
As well thousands of pages of document covering loans, mortgages, leases, debt, letterhead stationery, company names and registrations, would have had to have been changed and those changes ticked off by regulators and courts.
That would have made for huge costs and opened the potential for legal action if any errors were found in documents.
