Westpac considering spin-off option for New Zealand unit following banking regulator reprimand

SYDNEY: Westpac is considering whether to spin-off its New Zealand unit in response to changing local capital norms, it said on Wednesday, as the country's regulator ordered it to raise its cash holdings until it improves its risk governance.

The bank's statement came after the Reserve Bank of New Zealand (RBNZ) said Westpac NZ had, for years, operated outside of its own risk settings for technology, and would have to get two independent reviews to address concerns around its poor risk governance.

Westpac operates one of New Zealand's Big Four lenders dominating that market, with its New Zealand unit accounting for A$656 million ($498.76 million) in net profit for the group in the year to September 2020, its accounts show.

"Westpac NZ is a valuable part of the Westpac Group and has been for over 160 years," Westpac said in a statement to the exchange.

"However, given the changing capital requirements ... 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."

In 2019, RBNZ gave the country's top four banks seven years to almost double their capital and introduced a requirement to ring-fence their operations in New Zealand to boost financial stability.

The regulator's recent concerns about Westpac's governance underscore the bank's dated systems and convoluted procedures, which have led to record fines due to breaches of anti-money laundering law and market-share losses in mortgages, its main product.

"Westpac NZ will likely be forced to deploy technology investment to projects where the financial return is not compelling," Jefferies banking analyst Brian Johnson said.

He said New Zealand's higher capital requirements and stricter lending standards will slow the growth of mortage sales, adding that "the reality is that business is not as valuable to Westpac anymore."

On Tuesday, New Zealand introduced a raft of measures to cool its housing market, including slugging investors with higher taxes which Westpac strategists said could see home prices falling around 10% in the long-term.

Westpac was in the "very early stage" of assessing what was the best structure for its New Zealand business and whether a spin-off would be in the best interests of shareholders, the bank said, adding no decisions had been made.

Westpac shares dipped 0.9% on Wednesday, underperforming a wider market that posted slight gains on the day.

In an earlier statement on Wednesday, Westpac said it would support the independent reviewers to provide the necessary reports as required by RBNZ and act promptly on any recommendations.

The reprimand in New Zealand, where Westpac holds close to a 20% share of the commercial banking market, echoes criticism levelled at the bank by the Australian regulator in December about "long-standing weaknesses" in its risk controls.