Westpac agrees to "inefficient" changes to NZ operating model

By Gareth Vaughan Westpac has struck a deal with the Reserve Bank to shift institutional and corporate business currently undertaken in New Zealand through its Australian parent to its locally incorporated subsidiary. Westpac New Zealand CEO George Frazis said the move will see capital levels rise in the Kiwi subsidiary and create some costs. The reaching of an agreement between Westpac and the Reserve Bank was disclosed in Westpac's interim results yesterday. Speaking to interest.co.nz after a media briefing on the results, Frazis down-played the shift of assets and liabilities to Westpac's local subsidiary, saying from the customers' perspective it would have no impact. The move includes the transfer of institutional banking customer facing activities, both in lending and deposits, to Westpac New Zealand Ltd (WNZL) from Westpac Banking Corporation New Zealand Branch. The branch, rather than the locally incorporated bank, will continue providing financial market services to customers. Frazis said the move will see an increase in capital within WNZL that reflects the level of activity being moved across. It would take quite a bit of work to implement the changes, which would come at a cost. "It does create some inefficiency. It's not something that we've directly worked through, but at the end of the day it is what is," Frazis said. "It was a requirement from the Reserve Bank, but we are comfortable with the changes we have agreed." All of the business involved in the switch was already carried out in New Zealand, Frazis added, so the shift just meant the Reserve Bank's  regulatory oversight would be more direct. The changes to Westpac's New Zealand operational model can be traced back until at least 2004. That was when Westpac, which had been operating in New Zealand solely as a branch of its Australian parent, agreed to incorporate in New Zealand. WNZL was duly registered as a bank in November 2006 meeting the central bank's local incorporation policy that all systematically important banks operating in New Zealand be locally incorporated. However, since 2006 Westpac has run the dual registration operating model with WNZL conducting its retail and business banking activities in New Zealand and the branch established to undertake its institutional and financial market activities. Notes in the Westpac Group's interim results presentation point out that after non-compliance with some registration conditions in 2008, the Reserve Bank asked Westpac to review the structure of its New Zealand operations to ensure it was able to sustain durable compliance with the central bank's prudential policies. An independent review was agreed to and after consultation between Westpac and the Reserve Bank, the changed operating model has been agreed. Frazis said it would take "quite a bit of work" to implement the programme the two parties were developing. The new operating model is expected to be in place by the end of 2011. Reserve Bank spokesman Mike Hannah declined to comment on the Westpac changes. Pressure on CFR policy Meanwhile, Frazis said the central bank's plan to increase banks’ core funding ratio (CFR) to 75% from 65% within two years needed to be considered carefully. Essentially a set of rules that force banks to raise more funding domestically from regular mum-and-dad investors and through longer-term bonds, the Reserve Bank has specified a lift in the CFR to 75% by April 2012. It says New Zealand banks have had an unusually high proportion of their international debt securities maturing within one year compared with other developed countries. This makes the banks more vulnerable if ‘hot’ international wholesale markets freeze, as they did after the Lehman Bros collapse. Asked whether increasing the CFR could ultimately hit customers in the pocket as predicted by KPMG head of financial services Godfrey Boyce and ANZ New Zealand CEO Jenny Fagg, Frazis said there were two factors the Reserve Bank should, and no doubt was, considering in mulling the CFR increase. "What that does to the availability of credit and what it does to the cost of credit. Increasing to 75% would have a negative impact on both of those elements." This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.