Westpac’s 160 year involvement in the New Zealand banking sector might have reached an inflection point with the bank confirming on Wednesday it was mulling options to offload all or part of its Kiwi franchise.
Westpac revealed it was undertaking a strategic rethink of the New Zealand business after it was hit with further additional capital requirements by the Reserve Bank of New Zealand for ongoing problems with its risk governance.
The RBNZ has ordered the Kiwi arm to commission several independent reviews to correct chronic misreporting of credit and liquidity risks in the business.
In an ASX filing Westpac said the changing capital requirements in New Zealand and the RBNZ requirement to structurally separate Westpac’s NZ business from the parent, meant that it was now reviewing strategic options for the subsidiary.
“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 said.
“Westpac is in the very early stage of this assessment and no decisions have been made.
“This will also consider the impact of the Reserve Bank of New Zealand’s reviews which were announced today.”
While Westpac’s Kiwi arm is highly profitable, the subsidiary has created an operational headache for the parent following a string of compliance failures in the last decade.
As a result of systemic misreporting of credit and liquidity risks within the New Zealand arm, Westpac has been forced to carry the highest level of regulatory capital of the large Kiwi banks for several years.
The total capital ratio, which stood at a whopping 17 per cent at the end of September last year, is set to increase after the RBNZ’s latest action.
“We have experienced ongoing compliance issues with Westpac NZ over recent years, most recently involving material failures to report liquidity correctly, in line with the Reserve Bank’s liquidity requirements,” said RBNZ deputy governor, Geoff Bascand.
“Furthermore, the bank has continued to operate outside of its own risk settings for technology for a number of years.
“Westpac NZ needs to take a close look at its risk governance practices.”
The consensus among New Zealand banking experts is that Westpac is probably ‘grandstanding’ in the pattern of other Australian-owned banks that have come under scrutiny from RBNZ in the past.
However, most wouldn’t rule out the possibility given the record of Westpac chairman John McFarlane who in previous roles at ANZ and Barclays has demonstrated a willingness to sell profitable assets to fund new business strategies and share buybacks.
Massey University banking professor David Tripe believes a trade sale would be difficult for Westpac to execute, with the three other Australian major banks unlikely to test New Zealand’s competition regulators.
“I wouldn’t be surprised if Westpac’s statements are a bit of grandstanding given the regulatory action that has been taken today,’’ he said.
“If they are serious about exiting the business it certainly wouldn’t be an easy sale.”
Westpac’s Kiwi arm could fetch up to $NZ15 billion in a trade sale.
Tripe believes that a trade sale could only be executed in the current environment with a state-owned