Westpac demerger: What does that mean for NZ Inc.?

In recent days, Westpac Banking Corporation (WBC) announced it is considering a demerger of its New Zealand business. On 24 March 2021, WBC issued the following media release:

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As part of Westpac’s fix, simplify and perform strategy we have been actively  considering the businesses we operate in. 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 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 (RBNZ) 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 will provide further updates as required.

There has been a lot of conjecture in the press as to what this may mean and what the potential implications may be for customers and the banking industry.David McLean, Chief Executive of Westpac New Zealand Limited, has also provided some further background on these recent developments on the Westpac New Zealand Limited .

MinterEllisonRuddWatts’ Banking sector lead, Partner Kate Lane answers key questions about this announcement and considers the form a potential demerger might take.

What is a demerger and what would it mean in this context?

A ‘demerger’ is a legal and economic separation of distinct parts of a corporate group. In this instance the demerger would involve the separation of WBC and Westpac New Zealand Limited into two separately owned businesses.However, because Westpac New Zealand Limited is already a separate legal entity, regulated by the Reserve Bank and Financial Markets Authority (FMA), and required to maintain appropriate separation from its shareholder under New Zealand banking standards, the day-to-day impacts would be much less than they may be in other sectors.

What form could a demerger take?

If WBC decides to go ahead with a demerger, one model which seems likely is the model NAB used to demerge the Clydesdale Banking Group. This model involves the parent separating the subsidiary and listing it on a local stock exchange. David McLean specifically mentioned this form of demerger in his recent update.Under the NAB/Clydesdale model, existing shareholders in WBC would receive shares in the Westpac New Zealand Limited (or a new holding company which might own other New Zealand entities as well) which would then be listed, on relevant stock exchanges.In the NAB/Clydesdale demerger, the existing shareholders (of NAB) received 75% of the shares in the new entity. The remaining 25% of shares were sold to other investors through an initial public offering (IPO), however an IPO is not a necessary feature of a demerger.

Certain nuances did apply, for example NAB shareholders who held 2000 shares or less were given an option to sell their allocated Clydesdale shares into a share sale facility (without having to pay brokerage fees). The NAB/Clydesdale demerger also involved a court approved Scheme of Arrangement (under Australian law).This model is similar to demergers we have seen in New Zealand, including the demergers of NZME from APN and Tilt Renewables from Trustpower. On this basis, and particularly given the inherent similarities with the NAB/Clydesdale circumstances, it may well be a viable option for WBC if it decides to proceed with a demerger.

Why might a demerger be beneficial for New Zealand and New Zealand businesses?

There are many reasons why a WBC/Westpac New Zealand demerger might be beneficial for the New Zealand business. For example, a demerger would:§ be a hugely positive boost for capital markets in New Zealand;

§ provide New Zealand investors a clear route to owning a major New Zealand Bank, arguably a proxy for investment in the country’s economy; 

§ mean one of New Zealand’s four large banks would operate under the regulation of RBNZ only (rather than the ‘two-regulator’ model which the Australian-owned banks currently operate under); and

§ also be a signal of independence to the global economy, demonstrating that it is a viable and prudent option for a major New Zealand bank to be locally owned and operated.

What might a demerger mean for customers?

At this stage, this is hard to predict.If WBC decides to proceed with a demerger the implications will depend on the form of the demerger. However, it is likely that the implications for most NZ bank customers, employees and suppliers will be minimal – although there will likely be some detail around the markets business currently operated by a branch of Westpac Banking Corporation in New Zealand.

This is because Westpac New Zealand Limited is already a separate legal entity, holding its own registrations and licences from the Reserve Bank and FMA, and operating with the degree of separation from WBC required by applicable banking standards.

That is likely to continue as the main operating entity in the NZ group.Likewise, related entities, like Westpac Life NZ Limited (if included in the transaction), are already separate legal entities, holding their own registrations and licences from relevant New Zealand regulators.

It seems likely, but not inevitable, that a demerger might result in renaming and rebranding of Westpac New Zealand Limited.We wait with interest as to where the deliberations of WBC’s Board go.