As Westpac examines his Westpac NZ property, Gareth Vaughan wonders why someone could sell an oligopoly bank and who might want to buy an oligopoly bank

By Gareth Vaughan

News from the Westpac Banking Corporation of Australia review his property of Westpac New Zealand asks some key questions: Why would you sell an oligopoly bank? And who could want to buy an oligopoly bank?

New Zealand’s banking oligopoly, of course, consists of the Australian quartet of ANZ NZ, ASB, BNZ and Westpac NZ. Between them, they had total assets of $ 501 billion as of September 30 of last year. This represents 88% of total New Zealand banking assets. Westpac NZ, with total assets of $ 103 billion, ranks fourth. It eclipses Kiwibank which is fifth with total assets of $ 27 billion. (See the table at the bottom of this article for more details).

This market dominance means that the Big Four banks have been having a stellar time in New Zealand for years. Deutsche Bank analysts Matthew Wilson and Anthony Hoo summed this up two years ago, at a time when the big banks were pushing against the Reserve Bank‘s (RBNZ) proposals to increase their regulatory capital requirements.

“This single market structure, we have not yet found another, generates oligopoly-type returns. The four banks have an average return on equity of 15% and remit 65%, or 3.25 billion New Zealand dollars, income to parents in the form of dividends, ”Wilson and Hoo said.

So why would an owner of one of these banks want to give up on this?

Westpac’s announcement of the property review came hours after the RBNZ saying he had ordered Westpac NZ to increase its holding of cash, cash or assets that can be easily converted into cash, after being non-compliant with liquidity rules for eight years. Westpac noted this, along with the strengthening of outsourcing requirements by RBNZ – so that Westpac NZ can operate independently from its parent company – and the increased regulatory capital requirements of banks.

“Westpac NZ has been a valuable part of the Westpac Group for over 160 years. The company 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’s requirement to structurally separate Westpac’s business operations in New Zealand from its operations in Australia, it is now appropriate to assess the better structure for these activities in the future, ”said Westpac.

Westpac said it was “assessing the appropriate structure for its New Zealand business and whether a spin-off would be in the best interests of shareholders.”

the increase in RBNZ capital requirements, which the banks have seven years to gradually integrate, reduce the return on equity prospects of the big banks. Albeit from a high base.

The citation of RBNZ regulatory measures in Westpac’s statement should come as no surprise. Those with long memories will remember Westpac, even though he is the New Zealand government banker, does not hesitate to get into politically charged situations. This certainly happened in the run-up to Westpac NZ’s registration as a New Zealand Bank, a subsidiary of Westpac Banking Corporation, a subsidiary of Westpac Banking Corporation, in 2006. Until then, Westpac NZ’s business was run by a branch of the incorporated Australian bank. The change was made to bring Westpac into line with RBNZ’s local incorporation policy, and meant that all systemically important banks (the big four) were incorporated locally.

Behind this dispute lurked concerns on the New Zealand side about what might happen to Westpac NZ depositors in a liquidation situation, and for Westpac whether the change would see it run into a capital gains tax liability. transfer of assets from the branch to the company. incorporated subsidiary.

And his own backyard?

Westpac’s statement doesn’t say much about its domestic issues in Australia. These include the Royal Commission on Misconduct in the Banking, Superannuation and Financial Services Industry. In its 2019 financial results, Westpac included provisions for estimated refunds and payments to customers, associated costs and litigation of AU $ 958 million.

In addition, the Australian Prudential Regulation Authority (APRA) acted against Westpac violations liquidity standards in December. And before that, Westpac and Australia’s anti-money laundering regulator AUSTRAC struck a deal for the bank to pay a fine of A $ 1.3 billion for 23 million tickets of the Australian Anti-Money Laundering and Anti-Terrorism and Financing Act. The tickets included transactions associated with possible child exploitation.

This scandal saw Westpac CEO Brian Hartzer to resign at the end of 2019, to succeed former Westpac CFO, Peter King. Westpac’s cash profit for September 2020 fell 62% to A $ 2.608 billion. And in December Westpac announced the sale of its activities in the Pacific, Fiji and Papua New Guinea, to Kina Bank for a maximum amount of A $ 420 million.

And one should not underestimate the changes that APRA is requiring major Australian banks to make in the treatment of equity investments in subsidiaries such as their New Zealand offshoots. UBS analysts noted that: “The implication is that small investments, less than 10% of the parent company’s common stock base, can be further exploited. But large exhibitions such as New Zealand subsidiaries require more capital to protect Australian depositors in the event of default. “There is more to these APRA movements here and here.

In Westpac’s own words, the review of Westpac NZ ownership is part of the banking group’s “fix, simplify and execute” strategy. And there are a whole host of reasons why Westpac might have decided that now is the time to test the market for its Kiwi subsidiary.

So who could buy?

Moving on to the next question of who might want to buy Westpac NZ, we can expect a lot of tire kickers. Why not? Investment bankers who sense a good flow of fees will peddle the bank in all directions. And New Zealand institutional investors, gagged for a part by one of the country’s major banks, would like to see Westpac NZ listed on the stock market.

Options that may be considered by Westpac include maintaining Westpac NZ, selling it to Westpac shareholders and listing Westpac NZ on the stock market, or selling the New Zealand subsidiary to new owners.

From New Zealand Inc’s perspective, speculation will swirl over whether Kiwibank, backed by NZ Super Fund and ACC shareholders, could play a role for Westpac NZ. Realistically, given the size difference between the two banks, such a transaction would require serious financial engineering. In their 2019 report, Deutsche Bank’s Wilson and Hoo valued Westpac’s business in New Zealand at NZ $ 13.7 billion.

However, the idea of ​​a possible government involvement will also be launched. One suggestion on Twitter, for example, is to merge Westpac NZ and Kiwibank, keep a controlling stake, and use the combined entity as a political bank to expand business lending and finance affordable housing developers while registering a stake. minority on the NZX to allow the Kiwis to participate.

The last change of ownership at a major New Zealand bank took place when ANZ bought the National Bank from Lloyds TSB for almost $ 5.5 billion in 2003. However, it’s hard to see ANZ, BNZ’s parent bank, National Australia Bank or Commonwealth Bank of Australia, parent of ASB, seriously consider purchasing Westpac NZ today. They probably feel they have enough exposure to NZ and face the same APRA subsidiary capital rules as Westpac.

George’s return?

Meanwhile, The Australian The newspaper presented the Bank of Queensland as a potential bidder. This suggestion is interesting if for no other reason than because the Managing Director of Bank of Queensland is George Frazis, the former CEO of Westpac NZ. A spokeswoman for the Bank of Queensland said the bank was not commenting on the speculation.

Bank of Queensland is currently acquiring ME (Members Equity) Bank, which may keep it occupied for the time being. The acquisition of ME Bank will give the Bank of Queensland 2% of total Australian banking assets, or roughly A $ 92 billion. After leaving Westpac NZ in 2012, Frazis ran St George Bank for three years, which Westpac acquired in 2008. Thus, he knows both Westpac NZ and has experience running a branch relatively recently. acquired.

Japanese interest in Westpac NZ cannot be excluded. The last sale of a major New Zealand financial institution, UDC Finance, was to a Japanese bank. Shinsei Bank completed the $ 794 million acquisition of ANZ’s vehicle and asset financier last year.

Bank of China, China Construction Bank and Industrial and Commercial Bank of China, the three Chinese government-controlled banks operating in NZ, could certainly afford to buy Westpac NZ. But would they like it? So far, they appear to be pursuing a strategy of gradual growth in New Zealand. And are New Zealanders ready for one of their major banks to be owned by the authoritarian Chinese government?

Giant international banks or private equity funds from elsewhere in Asia, Europe and the United States cannot be excluded. And could fintech companies even play a role? Notably, Westpac already has partnership with buy now pay later service provider Afterpay. Afterpay is launch of a banking application in Australia with Westpac to keep Afterpay deposits on its balance sheet and meet APRA requirements on behalf of Afterpay.

I’m sure a lot of names will be thrown out before Westpac’s review of its Westpac NZ property is completed and dusted off.

If an agreement with a new owner is reached, a no objection notice will be required from the RBNZ, approval of the overseas investment office will be required if the buyer is an offshore entity, and if either from other oligopolistic banks is the buyer, trade The Commission should give its seal of approval. One might also wonder if the Westpac name would be kept and, if so, for how long?

So save your hat as there is plenty of water to flow under the bridge before Westpac NZ’s 1.3 million customers and 4,500 employees find out if they get a new owner for their bank.

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