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No Westpac NZ listing a blow to local sharemarket
June 24, 2021
Institutional investors say Westpac’s decision not to demerge its New Zealand business is a disappointment and a blow to the local sharemarket.
The dual ASX/NZX-listed Australian bank Westpac Group announced Thursday morning it would keepits New Zealand business after a detailed review found a demerger would not be in the best interests of its shareholders.
Westpac confirmed it was undertaking a review in March after it leaked out into the Australian media with the bank citing one reason as pressure it was facing from New Zealand regulator the Reserve Bank of New Zealand over reviews and an increase in capital.
Geoff Zame, head of institutional equities at Craigs Investment Partners, said in his morning note the announcement was a blow for the NZX which was “hugely under-represented in this critical part of the economy”.
The only New Zealand bank that is listed is Heartland Group which makes up a tiny part of the lending market.
The four Australian owned banks – Westpac, ANZ, ASB and BNZ – control around 86 per cent of mortgage lending in New Zealand.
Devon Funds Management’s portfolio manager Tama Willis said from a New Zealand investor point of view the demerger would have been welcomed given it would have diversified the NZX50 index and also created a business that would have been the largest New Zealand listed bank.
It could have made up as much as 8 per cent of the index which would have made it the second largest listed company after Fisher & Paykel Appliances, he said.
“It would have been a really good source of fully imputed dividends for New Zealand investors. Plus it would have given, KiwiSaver savings are continuing to build, it would have given another outlet for those savings.”
Willis said from a New Zealand point of view it would have been very positive but the issue the Australian parent and board were grappling with was did it present value for Australian shareholders.
“From my discussions with them recently 98 per cent of shareholders of Westpac are Australian-based.”
Willis said the challenge was how they would have made the transfer.
“As Australian investors sold and New Zealand investors bought, how could they ensure value for their Australian shareholders?”
Willis said there were risks that it wouldn’t present compelling value for the Australian shareholders to do that.
On top of that he said there were huge complexities around capital and demerger costs.
“I think when they weighed all those things up they came to a decision it wouldn’t present value.”
“I assume there were just too many questions they couldn’t answer about that.”
Willis said he had believed there was an even chance that Westpac would go ahead with the demerger and was slightly surprised the no decision came out so quickly.
“Given the issues that Westpac is facing in terms of they have a major cost out programme in Australia – shaving over $2 billion off their cost base – I did think maybe exiting New Zealand would have allowed them to focus on their core business in Australia.
“They have hit a block somewhere in their thinking around the risks.”
Willis said it didn’t necessarily preclude another bank from trying to list its New Zealand arm but they would be faced with the same challenges.
“It probably makes it less likely but not impossible.”
Willis said the media outing of Westpac’s review meant the bank had to make a decision quickly because of the implications of letting it drag out for a year for local management and teams.
“If you have got a lot of uncertainty around where the business ends up, that is not good for the business. So I think they had to make a decision either way, pretty quickly.”
Shane Solly, portfolio manager at Harbour Asset Management, said Westpac’s announcement was disappointing.
“It would have been great to see a good quality listing here in New Zealand.”
He said KiwiSaver was getting quite large and there needed to be more listings or capital raisings to invest in.
Solly said he did not think it would rule out the other banks from considering listing their New Zealand arms.
“They will all be considering it because of the [capital] changes.”
All New Zealand banks need to carry more capital under increased requirements from the Reserve Bank and there is anticipation this could tighten up lending and make it tougher to borrow.
Businesses and particularly those in the agricultural sector could find it tougher to access debt or find that it is more expensive.