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Australia's Westpac Banking Corporation in 'very early stage' of review of its ownership of Westpac New Zealand

Australia's Westpac Banking Corporation in 'very early stage' of review of its ownership of Westpac New Zealand

By Gareth Vaughan

In what could be the biggest ownership shake-up in New Zealand banking for years, Australia's Westpac Banking Corporation has confirmed it's reviewing its ownership of Westpac New Zealand.

The confirmation comes after a Wednesday report in The Australian Financial Review's Street Talk column saying Westpac had appointed investment bank Macquarie Capital to help with a scoping study reviewing the ownership of Westpac NZ. Options reportedly being considered include retaining the bank, spinning it off to Westpac shareholders which could be via a share market listing, or selling the NZ subsidiary to new owners. 

In a statement Westpac says as part of its "fix, simplify and perform strategy" it has been actively considering the businesses it operates. The announcement came later on the same day Westpac NZ had copped a serve from the Reserve Bank of New Zealand (RBNZ), which said there have been "ongoing compliance issues with Westpac NZ over recent years," and "the bank has continued to operate outside of its own risk settings for technology for a number of years."

Wednesday's Westpac announcement cited the issue over the RBNZ’s liquidity requirements detailed further below, and concerns over the RBNZ's strengthened outsourcing requirements and increasing bank capital requirements. However, it made scant mention of the Australian parent's recent woes at home.

The Australian Prudential Regulation Authority acted against Westpac breaches of liquidity standards in December. And last September Westpac and Australian anti-money laundering regulator AUSTRAC struck a deal for the bank to pay an A$1.3 billion penalty for 23 million contraventions of Australia's Anti-Money Laundering and Counter-Terrorism and Financing Act, a scandal that led to the resignation of Westpac CEO Brian Hartzer in late 2019.

Hartzer was succeeded by Westpac's former chief financial officer Peter King. Westpac's September year cash earnings fell 62% to A$2.608 billion. And in December Westpac announced the sale of its Pacific businesses, in Fiji and Papua New Guinea, to Kina Bank for up to A$420 million.

"Westpac has already placed a number of businesses into a Specialist Businesses Division, for ultimate exit. 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," Westpac says.

"Westpac is in the very early stage of this assessment and no decisions have been made. This will also consider the impact of the RBNZ's reviews which were announced today." 

"Westpac NZ is a valuable part of the Westpac Group and has been for over 160 years. The 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 says. 

"Westpac will provide further updates as required."

Breaking up the oligopoly?

Westpac NZ is part of an Australian-owned banking oligopoly, alongside ANZ NZ, ASB and BNZ, that controls nearly 90% of NZ banking sector assets. Westpac NZ has about 1.3 million customers including the NZ Government, and some 4,500 employees. The last ownership change at a major NZ bank was when ANZ bought the National Bank from Lloyds TSB for almost $5.5 billion in 2003.

As of September 30 last year, Westpac NZ had total loans of $88.255 billion, total assets of $103.192 billion, and total liabilities - excluding related entity liabilities - of $91.403 billion. Its September 2020 year net profit after tax weighed in at $550 million. 

A potential share market listing of Westpac NZ will doubtless create some excitement in NZ, However, Deutsche Bank analysts in 2019 looked at the possibility of share market listings of the Australian-owned NZ banks noting; "Whilst a partial listing would likely be welcomed by NZ investors and the broader NZ economy, it creates some capital/tax inefficiencies for the parent and thus may not be the most preferred outcome." 

The Deutsche analysts applied a pro-forma book value of NZ$9.609 billion to Westpac NZ in 2019.

The RBNZ telling off

Earlier on Wednesday the RBNZ said it had ordered Westpac NZ to increase its holding of liquid assets, cash or assets that can be easily converted into cash, after being non-compliant with liquidity requirements for eight years. 

The RBNZ has also asked Westpac to produce two independent reports. One that assesses Westpac NZ’s risk governance processes and practices applied by the Board and executive management, and a second to provide assurance that the actions Westpac NZ has taken to improve the management of their liquidity risks, and the culture surrounding it, are effective.

Asked how big the RBNZ requirement is for Westpac NZ to hold extra liquid assets, both in dollar and percentage terms of what it's already required to hold, a Westpac NZ spokesman told interest.co.nz the bank's still in discussions with the RBNZ on this.

The Westpac reference to "the RBNZ requirement to structurally separate" Westpac’s NZ business operations from its operations in Australia refers to the RBNZ's outsourcing policy. This requires large banks, being locally incorporated registered banks with liabilities, net of amounts owed to related parties of $10 billion or more, to have the legal and practical ability to control and execute outsourced functions such as IT processing, accounting and call centres themselves. ANZ NZ, ASB, BNZ, Westpac NZ, and Kiwibank are big enough to meet that criteria. 

The outsourcing policy was designed to ensure a large bank’s outsourcing arrangements don't create risk that the operation and management of the bank could be interrupted for a material length of time. The risk associated with outsourcing, including to an overseas parent bank, is if a supplier of outsourced functions was unable to provide that function for some reason. This could result in an unacceptable risk to the bank’s ability to operate, and therefore the wider financial system, the RBNZ says.

The RBNZ moved to strengthen the 2006 outsourcing policy to include a regulatory approval process for some outsourcing arrangements and other safeguards, such as independent reviews of compliance. The revised outsourcing policy was introduced in September 2017. The RBNZ put the cost, to banks, of the revised policy at $550 million, and the net benefit of the policy at $2.2 billion. The banks put the cost at $870 million and net benefits at $1.9 billion.

In May 2018 BNZ suffered a major weekend service lossincluding most banking, online banking, EFTPOS and ATM services, which was blamed on its parent National Australia Bank. At the time the RBNZ said NZ's major banks should have systems in place to prevent a repeat of that BNZ outage once they've implemented the new outsourcing policy, which they're required to transition to by September 30, 2023.

Not far from incoming total capital requirement

Westpac's statement also references increased NZ capital requirements. Delayed by the COVID-19 pandemic, the RBNZ has given banks a seven-year transition period to phase these in, starting from July 1 2021. 

The four big banks including Westpac NZ will require total capital equivalent to 18% of risk weighted assets (RWA). RWA are used to determine the minimum amount of capital that must be held by banks to reduce the risk of insolvency. As of September 30, Westpac NZ had an unaudited total capital ratio of 17.1% versus the current minimum requirement of 10.5%. There's more on the increasing bank capital requirements here, and Westpac NZ's alternative to the RBNZ's plans is here.

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62 Comments

Sh*t

As Westpac was one of the biggest perpetrators along with the other Australian banks and the NZ realestate industry of the biggest Ponzi scheme in New Zealand history you can understand why they heading for the door.
Their reputation in Australia is in tatters 25 Thousands cases of money laundering just one of their activity's.
My advise would be to get your money out of here and into a safe reputable bank like TSB.
We need kiwis to take over this bank it has worked very well with Z Fuel taking over Shell.

It will be better if RBNZ/Government asks all the Aussie Banks to uncouple their NZ entities into separate companies and list in the NZX. May be the Aussie parents can keep 60% ownership.
The rest has to be sold for the public, for better sharing of wealth.

So a power outage, led to BS11, led to this.

Oh the law of unintended consequences.

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Ah, well now. Exit from PNG & Fiji has been announced late 2020 I believe. Perhaps the perception of the direction of NZ , politicians and/or bureaucrats at present at least, is raising red flags. Simplistically anti farming, anti business, pro social welfare, pro idealism. In other words a vote of no confidence. Just speculating.

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Wow..your piece off string could stretch across the tasman ..keep pulling.

35
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Nervousness over NZ mortgage loan book??

22
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Pump and dump?

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Maybe they fear the collapse of the NZ housing Ponzi ? If I owned a NZ bank, I would run for the exit too, given how inflated this housing bubble has become.

Ashley Church says houses double every 10 years in price .... buy now ... gear up .... be super rich in the future , iron clad guarantee ...

... what could possibly go wrong.... easy peasy ....

Yeah agree, house prices have only doubled every 10 years because of the willingness of banks to lend and borrowers to borrow at ever increasing levels. You need someone to come along with more money and the ability to take on higher debt in the belief that it will make them rich. As I said yesterday, this has worked for the last 40-50 years. But go back further and they certainly did not double every 10 years! Central bank policy has driven this debt bomb..... I suspect to keep it going will require even more money to be sucked from the future, 40 and 50 year mortgages. The gen x’ers that are supposed to be the big money spenders in the economy are traditionally the big money spenders into the economy. Their debt levels mean that they won’t spend as much as their parents did. So which generation is going to be spending into the economy? If we only spend on essential items then jobs will go and new ones simply not be created. Time for a very, very big think on our economy. It will need to come from We the people though. We need to come up with a plan then tell the Politicians this is what we want. Time to stop being dictated to by politicians and bankers that know everything about nothing.

AC doesn't realise that there were houses in NZ prior to the 20 year bubble inflating .... the past 2 decades are an aberration , prior to that houses rose in price slowly , often in lock step with rises in inflation & wage increases .... houses were just a family thing then , somewhere to raise the kids .... not the key item in an investment mania ....

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Interesting timing...

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Westpac NZ is a valuable part of the Westpac Group and has been for over 160 years
Equals
In my view it is saying we have had a good run but we now see more risks than upside sell sell sell before ponzi collapses.
Also watch for the next bank to also follow this move which would def put a cloud over the future of NZ economic outlook.

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Perhaps we could get a bank that are capable of calculating core regulatory ratio's correctly?

Westpac are going nowhere, you don't shrink to greatness and the NZ business is one of their top units.

This is a childlike tanty and I really hope we call their bluff.

Does seem like they're playing chicken with the RBNZ.

Yes interesting point. Banks don’t want to be first to move but certainly don’t want to be last out either. It could also be an amazing opportunity to front run the reaction of the banks and create NZ owned personal banks and a national business bank. We are already well ahead of the big banking nations in our covid recovery ( USA, Europe, Uk). Time to leap ahead with bold visionary plans which would allow NZ to flourish. I suspect though that it just won’t happen. No appetite for change. Just same old same old. Take on lots of debt, buy nasty over priced rot boxes, buy online from Amazon and watch the economy sink into the mud while the central bankers tell us to spend more and take on more debt buying stuff that we don’t really need. Vicious circle of upwards spiralling debt. All quite sad really.

Absolutely predictable. Even most junior hire in my office knows this island is going down hard.

It'll be interesting to see if anyone can get a loan without a job in this country- unless they have twice the collateral of course.

Various regulations already stipulate establishing reasonable affordability of any assessment for credit. Given a benefit is next to nothing income-wise it's not a notion, it's a fact, that you need a job or business to get a loan.

Big move in Australia to drop their responsible lending rules that were recommended in the Hayne Royal Commission. Presumably, irresponsible lending rules will soon be introduced. These moves should scream desperation and that we are nearing the top of this debt fuelled ponzi scheme.

Back before banks went crazy lending on property; the saying used to be -
"A bank is a place where you can borrow money if you can prove that you don't need it"
Things have changed a lot. Perhaps too much?

Westpac was the financially worst performing of the Big 4 over the COVID financial year. That was telling on it's own, let alone their struggles to meet basic compliance and do anything innovative at all. Would love to hear the inside word from anyone working there.

So given the government uses Westpac for banking.. who will they move to

I'm sure the other Big 3 will happily line up for tender. Kiwibank would need replace it's core banking system which isn't going to happen anytime over the next few years. That said, you never know who might become majority shareholder as this doesn't mean their business just disappears.

Well> Would suggest Lord Jim of Anderton would roll in his grave, perceiving the irony of KiwiBank acquiring Westpac. Seeing as how the government can print $ billions at the drop of the hat, why not?

I doubt that would happen. It's not just the money, it's the rigmarole of orchestrating all that which may as well be left to the private sector. Anyway......bring back Trust Bank!

Maybe a good time to buy shares in the bank before the announcement

I do wonder if the big banks are coming under increasing threat from smaller innovative rivals & other forms of debt financing .... the beginning of a new era of creative destruction in their industry ...

Spot on Gummy Bear Hero.... plenty of banking products being developed on the blockchain to work alongside and/or independently of banks. Just about to log in to Real Vision Finance Crypto/blockchain 3 day conference. Preparing to have my mind blown by the scale of activities being undertaken....

Indeed. The innovation in the banking world is largely stagnant and I've not seen any real initiative to move with the times. So progressively they get competitor services chopping off chunks of their business. Look at what Wise has done for foreign currency transfers alone. ASB is the last bank here offering share trading, but newer kids on the block do it better. Add in what you see happening in the crypto space (something I was initially cynical of), then they have to change - or give up.

Me too re Crypto space. Absolutely incredible what is going on.

When crypto gets too big the governments will crack down on it. They want you using their garbage fiat currency that they can devalue on a whim.

Bank of China?

Imagine that

Wonder who would be up for buying that operation?

So they didn't tell their staff this, I'm telling you

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So $600 million profit is not enough for the risk profile of their lending book. What they are hiding...

They aren't hiding anything. They pulled the handbrakes on their PNG operations not too long ago when the island was going down and they're doing the same now they see the same happening to NZ.

It's just the course of business. Doesn't help when shareholders are hounding them for better returns without the fines.

That said, it's most likely the sale may take a mix form of spin offs and tranche sale.

I'd love to see all 4 banks listed (i.e. spun off) onto the NZX. So good for our capital markets. I don't know the figure but I'd suspect each of the NZ spin offs are at least $10b-$15b. Not many Private Equity have that kind of cash sitting idle.

... absolutely .... and , keep all the profits here at home where they're earnt ... gotta be good all around ... the NZX desperately needs new listings , and big ones ... good for Kiwisaver funds too ...

Thinker...how we ever allowed these Aussie banks to gain a stranglehold over our banking system is beyond me. With the huge sums ripped from our economy in the form of profit that disappears abroad we should aim them all out of the country and resign ourselves to dealing with the reputational damage that follows. Cut them loose. All 4 of them.

Interesting that the Clark Labour government stepped in and bailed out a disastrous AirNZ situation but the Bolger National government could not do that for the BNZ. Recall Winston Peters was all over that, questionable circumstances undisclosed etc, and left National as a result. Looking back at though, believe it the BNZ was more strategically important than AirNZ actually.

Whoever buys them out, could they please answer their phones quicker than 90 minutes?
And reopen their town branches to full business hours/days?

All banks want you to work online and Westpac is no exception...The more work Customers do online, the less staff they need and us poor folks have to wait for a Telephone to be answered....0800...be blowed. Cannot pay staff more each year, when profits decline and have to shipped off-shore to Aussie at lowering Rates. The simple fact is, these Aussie Banks, give far worse rates to Savers and Borrowers alike.....cos the Exchange Rate and the multiple of Lending amounts have to be recon-conned with using Funny Munny and Term Deposit Returns........Much Fiddling "while borrowings" are declined and Renting Magnates, use supposed equity to borrow more money into a Tax Deductible Situation, now revilled as being overstretched and of "declining worth" ......Interest rates have declined since the 'Good Old Days' when Banks could charge what they liked...'Interest Wise" 25% on over draft at last count at my Father-in-laws failing business... Banks want their pound of flesh, when trouble hits the Money Go Round....even moreso, when it stops......due to meddling by Orr And Grant and the Covid bail-out Brigade. 58 Billion and counting...puts Westpac profits into the small beer ....category.....plus Queens Town and the rich Listers decline..

Heartland will Buy

As a shareholder I'd love to see that but it seems unlikely. Back of the envelope, Westpac NZ is about 10x the size of Heartland.

So...if the NZ Government is a customer, what is the likely hood of it becoming a NZ Government owned public bank?

they are bluffing we a first world stable country with good profit margins hard to find in todays world. hope an American bank buys it then we get access to there market good luck.

The Sage of Omaha loves banks and he has a few billion to spare.

Goodbye ome foreign bank. Dont look back on the way. We will not miss them.

Tua...wish that Westpac really were thinking about getting out of NZ. Unfortunately it will be all about posturing to try to get the capital requirements delayed again. I wonder if John Key will be at the forefront of this banking crusade as he was last year. The banks really have got max value out of their bribes (in the form of a cushy directorship with insane perks) to him.

Watch this from Simon Dixon - Natwest Bank in the UK guilty of money laundering. Must be good friends with Westpac Australia! For those who don’t know him, he was a high level bankers and understands how the system works and how it can be manipulated in their favour. Think bank insurance will protect you credit balances, think again! There is not enough insurance to cover the deposits.....https://youtu.be/TvCXTfJ-qb0

Time for NZ to withdraw from the international banking cartel? Introduce a National bank to provide funding and banking services to businesses. We could also become a crypto/blockchain friendly nation attracting businesses here and leave the debt based ponzi scheme to the rest of the world.

We already have one. It's called The Reserve bank of New Zealand, and is the ultimate determinant of all things banking in this country.
The 'commercial banks' (they're really just glorified building societies) are already just an offshoot - they provide the retail experience - mortgage dissemination - that the RBNZ doesn't have to do.
So what will change? Just the logo on the CEO's business card.

Oh well at least David McLean was getting paid over $2million a year to facilitate a housing ponzi.

https://www.nzherald.co.nz/business/westpacs-kiwi-boss-david-mcleans-pay...

Infratil have a large war chest. Would they get into banking? Smart management team.

I've been part of two bank start-ups, and it's hard going! For instance:

Australian Bank Ltd
At the time of its establishment in 1981, it was the first new trading bank in Australia since 1945...initially successful, the bank soon struggled in the wake of the turmoil in the Australian banking environment during the mid to late 1980s, particularly with bad debts arising from loan funding ...

The team that did the above was probably the smartest you could get. Mark Johnson didn't give up after this less than stellar attempt, and went on to found ....Macquarie Bank Ltd.
https://en.wikipedia.org/wiki/Australian_Bank

A couple of people I follow have tried to set up banks. Both gave up.

Perhaps the government when they have to bail them out?

Giving up an easy $550m profit? Whats up with that?

OZ treated NZ like the independent branch, but in all honesty? - NZ suck up to CCP while OZ try to stand up to the big bully.. so? if I'm OZ, knowing how easy to fiddle with Kiwis? / shuffle them 'wealth' through land acquisitions.. push the unruly OZ banks practices to NZ, Put up more their groceries cost, make sure they accepts the unwanted crims/terrorist, let them copy the higher standard of OZ healthcare systems, lastly? just make sure to go ahead on off loading the Westpac branch to major China Banks, to ease up the land acquisitions by the mainland master. China will always playing a long term game/gamble, for sure with the looser opponents.